The Effect of Collateral Shocks in the Context of Labor Market Frictions

https://doi.org/10.1016/j.jbankfin.2021.106091

Journal of Banking and Finance, Vol. 125, 2021

49 Pages Posted: 30 Jun 2019 Last revised: 8 Mar 2021

See all articles by Shushu Liao

Shushu Liao

Auckland University of Technology

Date Written: February 17, 2020

Abstract

The recent financial crisis was associated with a large and prolonged deterioration to the collateral value and to the collateral-based credit supply. I calibrate a model to explore the impact of collateral shocks on real firm behavior. I discover that: (i) a negative shock to the collateral value depresses the business activities by tightening the borrowing capacity. Such adverse impact is alleviated (worsened) by a lower (higher) productivity-driven credit demand; (ii) following a negative collateral shock, the reduction of labor adjustment costs causes the firms to decrease their activities to a less extent, and such positive effects of labor adjustment flexibility are more pronounced for firms facing a high level of productivity (demand). Empirically, I find that a lower labor unionization rate can mitigate the negative impact of supply shocks on the high-demand firms during the crisis.

Keywords: Financial Crisis, Labor Adjustment Costs, Collateral Shocks, Capital Structure

JEL Classification: J52, G31, G32, G38

Suggested Citation

Liao, Shushu, The Effect of Collateral Shocks in the Context of Labor Market Frictions (February 17, 2020). https://doi.org/10.1016/j.jbankfin.2021.106091, Journal of Banking and Finance, Vol. 125, 2021, Available at SSRN: https://ssrn.com/abstract=3412111 or http://dx.doi.org/10.2139/ssrn.3412111

Shushu Liao (Contact Author)

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

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