Credit Constraints and the Persistence of Unemployment

24 Pages Posted: 2 Nov 2009

See all articles by Nicolas Dromel

Nicolas Dromel

Paris School of Economics (PSE)

Elie Kolakez

Université Paris II - Panthéon-Assas

Etienne Lehmann

CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); IZA Institute of Labor Economics

Abstract

In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 20 OECD countries. Our results suggest that credit market imperfections significantly increase the persistence of unemployment.

Keywords: credit markets, labor markets, unemployment, credit constraints, search frictions

JEL Classification: E24, E44, J08, J64

Suggested Citation

Dromel, Nicolas and Kolakez, Elie and Lehmann, Etienne, Credit Constraints and the Persistence of Unemployment. IZA Discussion Paper No. 4501, Available at SSRN: https://ssrn.com/abstract=1497707 or http://dx.doi.org/10.2139/ssrn.1497707

Nicolas Dromel (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

HOME PAGE: http://www.nicolas-dromel.com

Elie Kolakez

Université Paris II - Panthéon-Assas ( email )

12 place du Pantheon
Paris cedex 06, 75231
France

Etienne Lehmann

CREST ( email )

France

Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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