Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions

Eleni Iliopulos, Francois Langot and Thepthida Sopraseuth

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: We provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions. The matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it. We show that the magnitude of this non-linearity is magnified frictions. This asymmetric effect of the business cycle leads to sizable welfare costs. The model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter-cyclical opportunity costs of opening a vacancy and wage sluggishness

Keywords: Welfare; business cycle; financial friction; labor market search (search for similar items in EconPapers)
JEL-codes: E32 G21 J64 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-06
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14042

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