Credit constraints and the persistence of unemployment

Dromel, Nicolas L.;Kolakez, Elie;Lehmann, Etienne
(2010) 21st Annual Conference on European-Association-of-Labour-Economists — Location: Tallinn(Estonia) (10.September.2009)

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Authors
  • Dromel, Nicolas L.
    Author
  • Kolakez, Elie
    Author
  • Lehmann, EtienneUCLouvain
    Author
Abstract
In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 20 OECD countries. Our results suggest that credit market imperfections significantly increase the persistence of unemployment. (C) 2010 Elsevier B.V. All rights reserved.
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Dromel, N. L., Kolakez, E., & Lehmann, E. (2010). Credit constraints and the persistence of unemployment. Labour Economics, 17(5), 823-834. https://doi.org/10.1016/j.labeco.2010.04.005 (Original work published 2010)