Financial Markets and Unemployment

Tommaso Monacelli, Vincenzo Quadrini, Antonella Trigari

Bibliographic Information

NBER Working Paper No. 17389
Issued in September 2011
NBER Program(s):EFG

Available Formats


We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.

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