Credit Constraints and the Persistence of Unemployment
24 Pages Posted: 2 Nov 2009
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: Suggested Citation
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