Financial Amplification of Labor Supply Shocks
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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.
Series:
Working Paper No. 2020/189
Subject:
Collateral COVID-19 Economic theory Financial institutions Health Labor Labor supply Labor taxes Supply shocks Taxes
Frequency:
regular
English
Publication Date:
September 18, 2020
ISBN/ISSN:
9781513557311/1018-5941
Stock No:
WPIEA2020189
Pages:
34
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