Disentangling goods, labor, and credit market frictions in three European economies

Abstract

We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In the three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: Most of the variation in unemployment comes from the speed of matching in the labor market. * This paper previously circulated under the title "A steady-state model of a non-Walrasian economy with three imperfect markets." We thank the participants of the conference in honor of Chris Pissarides, June-July 2015, the participants of seminars in Cologne (Macro group), U. Geneva, ILO seminar, and in particular Martin Scheffel, Matthieu Charpe, Frédéric Robert-Nicoud. These views are those of the authors and do not necessarily reflect the views of the Federal Reserve System. All remaining errors are our own. Etienne Wasmer also acknowledges support from ANR-11-LABX-0091 (LIEPP) and ANR-11-IDEX-0005-02.

State dependence of fiscal multipliers: the source of fluctuations matters

“…The framework builds on the general-disequilibrium model byBarro and Grossman (1971), whose application to fiscal policy is considered in van Wijnbergen(1987). Recent studies with goods market search frictions includeBai et al (2012), Den Haan (2013),Gourio and Rudanko (2014),Brzustowski et al (2018) andRoldan-Blanco and Gilbukh (2020). Adding search frictions to the labor market with flexible wages leaves our results for fiscal multipliers unchanged.…”