CREDIT CONSTRAINTS AND THE PERSISTENCE OF UNEMPLOYMENTBY: NICOLAS DROMEL, ELIE KOLAKEZ, AND ETIENNE LEHMANN

Group C Steven Bodi, Mitchell Steffler, Yaqin Hu, Kelby Krotz, Manmeet Litt, Jordan Kirkpatrick

Outline

General Overview Literature Review Model Presentation

Assumptions Empirical Analysis

Assumptions and regression results Conclusions

Relevance to public policy

General Overview The paper argues that credit market

imperfections not only impact level of unemployment, it also causes persistence

Entrepreneurs require capital to invest in creating new jobs, which they must borrow from banks – only allowed fraction of pledgeable assets Too low value of assets = restriction on job creation Bubbles are assumed away in this model, What if

assets are valued too high? More stringent credit constraints are associated with

higher unemployment

Explanation for this idea: Theoretically:

Using a model that extends the steady –state model framework presented by Mortenson and Pissarides (1999) and Pissarides (2000)

Empirically: Analysis conducted on 20 OECD countries (1982 – 2003

period) – looking regressions and interaction terms between lagged unemployment and the measure for stringency of credit constraints to explain the persistence.

Underlying premise of research done for this paper draws conclusions for the consequences of credit market frictions

More stringency = higher unemployment

Literature

Credit market imperfections credit constraint Kiyotaki and Moore (1997), Aghion (1999), Matsuyama (2007)

Credit market imperfections and business cycle assuming no labour market frictions Bernanke(1989) and Kiyotaki(1997),

Aghion (1999) and Matsuyama (2007),

Buera and Shin (2008)

Credit market imperfections and unemployment steady-state level of unemployment persistence of unemployment Acemoglu (2001), Redon (2005), Petrosky-Nadeau (2009, 2010)

Matching Model

Actors, Framework, and VariablesAuthors use general equilibrium matching model developed by Morgensen and Pissarides (1999), Pissarides (2000)

Functional Relationships:tightness of labour market expressed as Rate job vacancy meets a worker:

= rate unemployed leave unemployment

 

 

Equilibrium Concept

Evolution of L is driven by difference between inflows and outflows

Steady-state is when

EQUILIBRIUMCharacterised by: JC = BCLenders continue to provide credit to entrepreneurs until Economy is on JC curve at each point in time

> 0

< 0 > 0

< 0

DYNAMICS

JOB CREATION & CREDIT• Only entrepreneurs create

jobs,• Bankers lend credit to

entrepreneurs according to the relation

• where jobs are the only assets of firms

Transitional Dynamics of the Economy

Under credit constraints the expediency of a return to long-run equilibrium is impeded

𝜃 L

t t

ESTIMATED MODELS

EMPIRICAL EVIDENCE

Specifications     Dependent variable: unemployment (UR_i,t)

14a 14b 14c 14d 14e

1-period lagged unemployment (UR_i, t-1) 0.77*** 0.77*** 0.74*** 0.74***

(38.80) (37.36) (32.95) (33.44)

Private credit (CRE_i,t) -1.41*** -0.01 -0.42* -0.35

(-3.72) (-0.05) (-1.91) (-1.55)

CRE_i,t * UR_i,t-1 -0.12*** -0.11***

(-3.27) (-2.74)

Replacement rate (ARR_i,t) 0.018** 0.12*** 0.017* 0.023*** 0.041***

(1.97) (6.73) (1.93) (2.62) (3.85)

High corporatism (CORP_i,t) -0.69*** -2.34*** -0.69*** -0.77*** -0.99***

(-3.14) (-6.13) (-3.12) (-3.44) (-4.23)

Union density (UNDENS_i,t) 0.014 0.012 0.014 0.008 0.016*

(1.54) (0.67) (1.51) (0.89) (1.66)

Labour tax wedge (TW_i,t) 0.024* 0.20*** 0.024* 0.032** 0.039***

(1.78) (6.99) (1.66) (2.25) (2.70)

Employment protection (EPL_i,t) -0.41*** -0.66** -0.40** -0.51*** -0.53***

(-2.62) (-1.99) (-2.57) (-3.09) (-3.37)

Product market regulation (PMR_i,t) 0.17** 0.56*** 0.17** 0.21*** 0.017**

(2.09) (2.94) (2.06) (2.59) (2.10)

Output gap (OGAP_i,t) -0.21*** -0.44*** -0.21*** -0.21*** -0.21***

(-11.97) (-12.9) (-11.83) (-12.37) (-11.75)

Observations     369 369 369 369 369

Main Results

One period lagged unemployment () Significant at the 1% level Positive

Ratio of private credit by deposit money banks and other financial institutions to GDP () Significant at 1% level 14b, not significant 14c, significant

at 10% level in 14d Negative

Interaction between and Significant at 1% level Negative

Conclusion & Assumptions

The model assumes all firms face the same constraints in terms of financing.

Entrepreneurs have no capital of their own in this model.

Bubbles are assumed away At any time: Value of a job = net gain from employee/

(bankers lending costs + job deterioration rate.) Jobs dissolved exogenously (relation? Credit to

replace workers with capital?) The model and the empirics clearly show that

removing credit constraints reduce the equilibrium levels of employment and duration