The cyclical volatility of labor markets under frictional financial markets

Nicolas N. Petrosky-Nadeau, Etienne Wasmer

Research output: Contribution to journalArticlepeer-review


We provide a dynamic extension of an economy with search on credit and labor markets (Wasmer and Weil 2004). Financial frictions create volatility. They add an additional, almost acyclical, entry cost to procyclical job creation costs, thus increasing the elasticity of labormarket tightness to productivity shocks by a factor of five to eight, compared to a matching economy with perfect financial markets. We characterize a dynamic financial multiplier that is increasing in total financial costs and minimized under a credit market Hosios- Pissarides rule. Financial frictions are an element of thesolution to the volatility puzzle.

Original languageEnglish (US)
Pages (from-to)193-221
Number of pages29
JournalAmerican Economic Journal: Macroeconomics
Issue number1
StatePublished - Jan 2013

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)


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