Financial Amplification of Labor Supply Shocks

Author/Editor:

Nina Biljanovska ; Alexandros Vardoulakis

Publication Date:

September 18, 2020

Electronic Access:

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Summary:

We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner’s allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.

Series:

Working Paper No. 20/189

Frequency:

regular

English

Publication Date:

September 18, 2020

ISBN/ISSN:

9781513557311/1018-5941

Stock No:

WPIEA2020189

Format:

Paper

Pages:

34

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