Financial Amplification of Labor Supply Shocks
IMF Working Papers, September 18, 2020
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Bibliographic details
- Authors: Nina Biljanovska, Alexandros Vardoulakis
- Published: September 18, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513557311.001
Overview
- Authors: Nina Biljanovska, Alexandros Vardoulakis
- Date: September 18, 2020
- Core question: How do financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints?
- Model setup:
- Workers supply labor to entrepreneurs.
- Entrepreneurs borrow to purchase factors of production.
- Borrowing capacity is restricted by the value of capital, creating a pecuniary externality when financing constraints bind.
- A distributive externality operates through wages.
- Contextual example: Labor shocks such as the COVID-19 shock amplify policy responses depending on whether financing constraints bind.
Key findings and mechanisms
- Financial amplification:
- Financing constraints tied to collateral (value of capital) generate a pecuniary externality that amplifies labor supply shocks when constraints bind.
- Distributive externality:
- Wages mediate a distributive externality that interacts with financing constraints to influence aggregate outcomes.
- Decentralization of planner’s allocation:
- The planner’s allocation can be decentralized using two instruments:
- a credit tax/subsidy
- a labor tax/subsidy
- Policy response amplification:
- Labor shocks amplify policy responses, and the nature of optimal policy critically depends on whether financing constraints are binding.
Policy implications and instruments
- Two targeted instruments can implement the planner’s allocation:
- Credit tax/subsidy to address pecuniary externalities arising from collateral constraints.
- Labor tax/subsidy to correct distributive externalities transmitted through wages.
- Relevance for pandemic policy:
- Labor supply shocks like those from COVID-19 strengthen the importance of assessing whether financing constraints bind when designing fiscal and credit interventions.
Publication and metadata
- Series: Working Paper No. 2020/189
- Issue: 189
- Volume: 2020
- Pages: 34
- DOI: https://doi.org/10.5089/9781513557311.001
- Stock No: WPIEA2020189
- ISBN: 9781513557311
- ISSN: 1018-5941
- Citation preview (Chicago): Nina Biljanovska, and Alexandros Vardoulakis. "Financial Amplification of Labor Supply Shocks", IMF Working Papers 2020, 189 (2020), accessed 9/18/2026, https://doi.org/10.5089/9781513557311.001
Source: IMF Working Papers landing page for "Financial Amplification of Labor Supply Shocks"
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