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Unemployment and vacancy dynamics with imperfect financial markets

Carrillo-Tudela, Carlos and Graber, Michael and Waelde, Klaus (2018) 'Unemployment and vacancy dynamics with imperfect financial markets.' Labour Economics, 50. 128 - 143. ISSN 0927-5371

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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 do not depend on the unemployment rate 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.

Item Type: Article
Uncontrolled Keywords: Job search, Unemployment, Financial markets
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 08 Jun 2017 16:03
Last Modified: 27 Oct 2018 01:00
URI: http://repository.essex.ac.uk/id/eprint/19571

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