Macroeconomic dynamics in a model of goods, labor, and credit market frictions

Nicolas Petrosky-Nadeau, Etienne Wasmer

Research output: Contribution to journalArticle

Abstract

Goods market frictions drastically change the dynamics of the labor market, both in terms of persistence and volatility. In a model with three imperfect markets - goods, labor, and credit - we find that credit and goods market imperfections are substitutable in raising volatility. Goods market frictions are unique in generating persistence. Two key mechanisms in the goods market generate large hump-shaped responses to productivity shocks: countercyclical goods market tightness and prices alter future profit flows and raise persistence; procyclical search effort of consumers and firms raises amplification. Goods market frictions are thus key in understanding labor market dynamics.

Original languageEnglish (US)
Pages (from-to)97-113
Number of pages17
JournalJournal of Monetary Economics
Volume72
DOIs
StatePublished - May 1 2015

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Keywords

  • Credit market frictions
  • Goods market search
  • Labor market dynamics
  • Propagation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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