IMF Working Papers

Financial Amplification of Labor Supply Shocks

By Nina Biljanovska, Alexandros Vardoulakis

September 18, 2020

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Nina Biljanovska, and Alexandros Vardoulakis. Financial Amplification of Labor Supply Shocks, (USA: International Monetary Fund, 2020) accessed September 20, 2024

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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.

Subject: Collateral, COVID-19, Economic theory, Financial institutions, Health, Labor, Labor supply, Labor taxes, Supply shocks, Taxes

Keywords: Asset price, Collateral, Collateral constraint, Collateral constraints, COVID-19, Distributive externality, Financial amplification, Global, Labor share, Labor shock, Labor supply, Labor supply shock, Labor tax, Labor taxes, Pandemic, Pecuniary externality, Quantitative analysis, Supply shocks, Utility function, WP

Publication Details

  • Pages:

    34

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/189

  • Stock No:

    WPIEA2020189

  • ISBN:

    9781513557311

  • ISSN:

    1018-5941

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