Credit Constraints and the Persistence of Unemployment

Via Economic Logic, an interesting new paper on the interaction of unemployment and credit constraints

Dromel, Kolakez and Lehman
link here


In this paper, we argue that credit market imperfections impact not only the level of un- employment, but also its persistence. For this purpose, we Örst develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pis-sarides (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 19 OECD countries. Our results suggest that credit market imperfections would significantly increase the persistence of unemployment.