Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Working Paper

Effects of Credit Supply on Unemployment and Inequality

Abstract: The Great Recession, which was preceded by the financial crisis, resulted in higher unemployment and inequality. We propose a simple model where firms producing varieties face labor-market frictions and credit constraints. In the model, tighter credit leads to lower output, lower number of vacancies, and higher directed-search unemployment. Where workers are more productive at higher levels of firm output, lower credit supply increases firm capital intensity, raises inequality by increasing the rental of capital relative to the wage, and has an ambiguous effect on welfare. At initial high levels of labor share in total costs tighter credit lowers welfare. This pattern reverses during an expansionary phase caused by higher credit availability.

Keywords: Monopolistic competition; functional inequality; search unemployment; credit constraints;

JEL Classification: D43; E24; G21; J31; J64; L11;


Access Documents

File(s): File format is application/pdf https://research.stlouisfed.org/wp/2016/2016-013.pdf
Description: Full text

File(s): File format is text/html http://dx.doi.org/10.20955/wp.2016.014
Description: http://dx.doi.org/10.20955/wp.2016.014


Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2016-06-15

Number: 2016-13

Pages: 25 pages