Debt constraints and employment

Patrick J. Kehoe, Virgiliu Midrigan, Elena Pastorino

    Research output: Contribution to journalArticlepeer-review


    During the Great Recession, US regions that experienced large declines in household debt also experienced large drops in consumption, employment, and wages. We develop a search and matching model in which tighter debt constraints raise the cost of investing in new job vacancies and so reduce job-finding rates and employment. On-the-job human capital accumulation is critical to generating sizable drops in employment: it increases the duration of the benefit flows from posting vacancies, thereby amplifying the employment drop from a credit tightening 10-fold relative to the standard model. Our model reproduces the salient cross-regional features of the US Great Recession.

    Original languageEnglish (US)
    Pages (from-to)1926-1991
    Number of pages66
    JournalJournal of Political Economy
    Issue number4
    StatePublished - Aug 1 2019

    ASJC Scopus subject areas

    • Economics and Econometrics


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