Financial Markets and Unemployment

53 Pages Posted: 26 Oct 2012

See all articles by Tommaso Monacelli

Tommaso Monacelli

Bocconi University - Department of Economics

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Antonella Trigari

Bocconi University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2012

Abstract

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 different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they do not have shortage of funds for hiring. The empirical relevance of these shocks is validated by the structural estimation of the model. The theoretical predictions are also consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.

Keywords: limited enforcement, wage bargaining, unemployment, credit shocks

JEL Classification: E24, E32, E44

Suggested Citation

Monacelli, Tommaso and Quadrini, Vincenzo and Trigari, Antonella, Financial Markets and Unemployment (October 1, 2012). Paolo Baffi Centre Research Paper No. 2012-129; Marshall School of Business Working Paper No. FBE 01.13. Available at SSRN: https://ssrn.com/abstract=2166737 or http://dx.doi.org/10.2139/ssrn.2166737

Tommaso Monacelli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Antonella Trigari (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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