This paper argues that output volatility depends on the degree of credit market imperfection. In the early stages of financial development, agents are constrained in their borrowing ability. As a result, the individual savings, affected by the labor supply, play a dual role in the economy, having repercussions on the interest rate. On the one hand, high savings imply high investment, low marginal product of capital and thus low interest rate. On the other hand, high savings affect the agents' ability to run highly productive investment projects, which increases the interest rate.When the former effect is dominant, a dynamic complementarity between individual and aggregate labor supply arises. This leads to a local and global indeterminacy of equilibrium paths. If the borrowing constraint is relaxed, the complementarity between individual and aggregate labor supply decisions weakens, equilibrium becomes globally unique and the possibility of having aggregate fluctuations in output disappears.

Agliari, A., Vachadze, G., Credit market imperfection, labor supply complementarity, and output volatility, <<ECONOMIC MODELLING>>, 2014; 38 (N/A): 45-56. [doi:10.1016/j.econmod.2013.10.039] [http://hdl.handle.net/10807/52371]

Credit market imperfection, labor supply complementarity, and output volatility

Agliari, Anna;
2014

Abstract

This paper argues that output volatility depends on the degree of credit market imperfection. In the early stages of financial development, agents are constrained in their borrowing ability. As a result, the individual savings, affected by the labor supply, play a dual role in the economy, having repercussions on the interest rate. On the one hand, high savings imply high investment, low marginal product of capital and thus low interest rate. On the other hand, high savings affect the agents' ability to run highly productive investment projects, which increases the interest rate.When the former effect is dominant, a dynamic complementarity between individual and aggregate labor supply arises. This leads to a local and global indeterminacy of equilibrium paths. If the borrowing constraint is relaxed, the complementarity between individual and aggregate labor supply decisions weakens, equilibrium becomes globally unique and the possibility of having aggregate fluctuations in output disappears.
2014
Inglese
Agliari, A., Vachadze, G., Credit market imperfection, labor supply complementarity, and output volatility, <<ECONOMIC MODELLING>>, 2014; 38 (N/A): 45-56. [doi:10.1016/j.econmod.2013.10.039] [http://hdl.handle.net/10807/52371]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/52371
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