Financial Amplification of Labor Supply Shocks

By Nina Biljanovska, Alexandros Vardoulakis

September 18, 2020

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Format: Chicago

Nina Biljanovska, and Alexandros Vardoulakis. Financial Amplification of Labor Supply Shocks, (USA: International Monetary Fund, 2020) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Collateral, COVID-19, Economic theory, Financial institutions, Health, Labor, Labor supply, Labor taxes, Supply shocks, Taxes

Keywords: Asset price, Collateral, Collateral constraint, Collateral constraints, COVID-19, Distributive externality, Financial amplification, Global, Labor share, Labor shock, Labor supply, Labor supply shock, Labor tax, Labor taxes, Pandemic, Pecuniary externality, Quantitative analysis, Supply shocks, Utility function, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/189
Stock No:

WPIEA2020189
ISBN:

9781513557311
ISSN:

1018-5941

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