Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/125045
Authors: 
Carrillo-Tudela, Carlos
Graber, Michael
Wälde, Klaus
Year of Publication: 
2015
Series/Report no.: 
IZA Discussion Papers 9525
Abstract: 
This paper proposes a simple general equilibrium model with labour market frictions and an imperfect financial market. The aim of the paper is to analyse the transitional dynamics of unemployment and vacancies when financial constraints are in place. We model the financial sector as a monopolistically competitive banking sector that intermediates financial capital between firms. This structure implies a per period financial resource constraint which has a closed form solution and describes the transition path of unemployment and vacancies to their steady state values. We show that the transition path crucially depends on the degree of wage flexibility. When wages are bargained sequentially the transition path is always downward sloping. This implies unemployment and vacancies adjust in opposite directions as observed in the data. When calibrating the model to the Great Recession and its aftermath we find that the lack of an improvement in the financial sector's effectiveness to intermediate resources played a crucial role in the slow recovery of the labour market.
Subjects: 
job search
unemployment
financial markets
JEL: 
J63
J64
G10
Document Type: 
Working Paper

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