Anatomy of a Credit Crunch : From Capital to Labor Markets

Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate and micro-level implications of a credit crunch—i.e., a sudden tightening of collateral constraints. When we simulate a credit crunch calibrated to match the observed decline in the ratio of debt to non-financial assets of the United States business sector following the 2007–2008 crisis, our model generates a sharp decline in output—explained by a drop in aggregate total factor productivity and investment—and a protracted increase in unemployment. We then explore the micro-level impact by tracking the employment dynamics for firms of different sizes and ages. The credit crunch causes a much larger reduction in the net employment growth rate of small, young establishments relative to that of large, old producers, consistent with the recent empirical findings in the literature.

Bibliographic Details

Main Authors:	Buera, Francisco J., Fattal Jaef, Roberto N., Shin, Yongseok
Format:	Journal Article biblioteca
Language:	en_US
Published:	Elsevier 2014-11-11
Subjects:	Financial frictions, Unemployment, capital markets, labor markets, Credit,
Online Access:	http://hdl.handle.net/10986/20724
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