Interaction of Labour and Credit Market in Growth Regimes: A Theoretical and Empirical Analysis 

30 Pages Posted: 6 Oct 2016

See all articles by Ekkehard Ernst

Ekkehard Ernst

International Labour Organization (ILO)

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: November 2016

Abstract

Earlier research on the links between economic growth and credit market development has abstracted from interactions between labour and financial markets. Moreover, most studies have analysed macro‐finance linkages at the aggregate level, ignoring the decentralized nature of search and matching in labour and credit markets. This paper fills this void and thus allows for a more disaggregate analysis of policy effects. We show that the credit market exacerbates and accentuates the labour market effects, having amplifying effects on output, consumption, employment and welfare. Depending on the strength of the debt‐dynamics, several growth dynamics emerge from this interaction between labour and credit markets with two distinct steady states: a stable growth regime and another one that is vulnerable and unstable. To test the empirical implications of the theoretical model, a multi‐regime VAR (MRVAR) model is fitted to the US output and credit market data. The MRVAR estimation indicates that shocks to credit conditions during a high‐growth period have markedly different effects than during a low growth and recessionary period. Also, there are substantial state‐dependent asymmetries with respect to the sign of shocks to credit conditions, confirming the theoretical predictions.

Suggested Citation

Ernst, Ekkehard and Mittnik, Stefan and Semmler, Willi, Interaction of Labour and Credit Market in Growth Regimes: A Theoretical and Empirical Analysis  (November 2016). Economic Notes, Vol. 45, Issue 3, pp. 393-422, 2016. Available at SSRN: https://ssrn.com/abstract=2848588 or http://dx.doi.org/10.1111/ecno.12062

Ekkehard Ernst (Contact Author)

International Labour Organization (ILO) ( email )

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Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics ( email )

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Kiel, Schleswig-Holstein 24118
Germany

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Willi Semmler

The New School - Department of Economics ( email )

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New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

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Bielefeld, NRW
Germany

IIASA ( email )

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Laxenburg/Austria, A-2361
Austria

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