Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

Nicolas Petrosky-Nadeau (1) , Etienne Wasmer (2)

1 Tepper School of Business
2 ECON - Département d'économie (Sciences Po)

Goods market frictions drastically change the dynamics of the labor market, both in terms of persistence and volatility. In a model with three imperfect markets – goods, labor, and credit – we find that credit and goods market imperfections are substitutable in raising volatility. Goods market frictions are unique in generating persistence. Two key mechanisms in the goods market generate large hump-shaped responses to productivity shocks: countercyclical goods market tightness and prices alter future profit flows and raise persistence; procyclical search effort of consumers and firms raises amplification. Goods market frictions are thus key in understanding labor market dynamics.

Keywords: Goods market search; Labor market dynamics; Propagation; Credit market frictions

Domains: Humanities and Social Sciences; Economics and Finance

Nicolas Petrosky-Nadeau, Etienne Wasmer. Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions. Journal of Monetary Economics, 2015, 72, pp.97 - 113. ⟨10.1016/j.jmoneco.2015.01.006⟩. ⟨hal-03392977⟩