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Financial Amplification of Labor Supply Shocks
Author:
Nina Biljanovska
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and
Alexandros Vardoulakis null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 189
Language:
English
Publication Date:
18 Sep 2020
DOI:
https://doi.org/10.5089/9781513557311.001
ISBN:
9781513557311
ISSN:
1018-5941
Pages:
34
Keywords:
WP; utility function; quantitative analysis; labor supply shock; pecuniary externality; collateral constraint; asset price; labor tax; distributive externality; labor shock; labor share; Labor supply; Collateral; Labor taxes; Supply shocks; Global; Collateral constraints; COVID-19; pandemic; financial amplification
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund