Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-13T03:08:12.932Z Has data issue: false hasContentIssue false
  • English
  • Français

UNSECURED CREDIT, PRODUCT VARIETY, AND UNEMPLOYMENT DYNAMICS

Published online by Cambridge University Press:  22 April 2020

Mario Rafael Silva
Mario Rafael Silva*
Affiliation:
Tongji University
*
Address correspondence to: Mario Rafael Silva, Room 830, Department of Economics and Finance, Tongji University, 1500 Siping Road, 200092, Shanghai, China. e-mail: msilva913@tongji.edu.cn. Phone: 136-6178-0491.
Get access Rights & Permissions [Opens in a new window]

Abstract

Revolving credit is the prime determinant of short-run household liquidity and comoves positively with product variety and negatively with unemployment. I develop a theory of feedback between revolving credit and product development and examine its ability to explain labor market volatility. Extending the Mortensen–Pissarides model with an endogenous borrowing constraint and free entry of monopolistically competitive firms reproduces stylized facts in the data and amplifies both productivity and financial shocks through mutual causality. Higher debt limits encourage firm entry and raise product variety (the entry channel), and greater variety makes default more costly and thereby raises the equilibrium debt level (the consumption value channel). Though productivity shocks are sufficient to generate higher volatility, financial shocks are essential in approximating the time series patterns of unemployment, vacancies, and revolving credit in the data, and reproduce the rise in unemployment during the Great Recession.

Keywords

UnemploymentMonopolistic CompetitionEndogenous Debt LimitsFirm EntryOccasionally Binding Constraints
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 2 , March 2022 , pp. 277 - 313
Copyright
© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I would like to thank Guillaume Rocheteau for ongoing advice, support, and mentoring, and William Branch for many helpful comments. I also thank the participants of the 2016 Midwest Macro Meetings, the 2016 West Coast Search and Matching Working in San Francisco, and the Western Economic Association International Conference at Portland, and the Tongji University seminar series. Special thanks go to Fabio Milani, Benjamin Tengelsen, Nicolas Petrosky-Nadeau, Andy Glover, Bob Hall, Alyson Ma, Paul Beaudry, Pascal Michaillat, Mathieu Taschereau-Dumouchel, Fernando Martin, Huiyu Li, Bruce McGough, Paul Jackson, Ayushi Bajaj, and Zach Bethune; and for assistance from the UC Irvine Macroeconomics Reading Group. Several anonymous referees also provided invaluable input. I also gratefully acknowledge financial assistance from the Graduate Dean’s Dissertation Fellowship. This research did not receive any other grant from agencies in the public, commercial, or not-for-profit sectors. Any remaining errors are mine.

References

Aguirregabiria, V. and Mira, P. (2007) Sequential estimation of dynamic discrete games. Econometrica 75(1), 1–53.CrossRefGoogle Scholar
Alvarez, F. and Jermann, U. J. (2000) Efficiency, equilibrium, and asset pricing with risk of default. Econometrica 68(4), 775–797.CrossRefGoogle Scholar
Barnichon, R. (2010a) Building a composite help-wanted index. Economics Letters 109(3), 175–178.CrossRefGoogle Scholar
Barnichon, R. (2010b). Productivity and unemployment over the business cycle. Journal of Monetary Economics 57(8), 1013–1025.CrossRefGoogle Scholar
Berentsen, A., Menzio, G. and Wright, R. (2011) Inflation and unemployment in the long run. American Economic Review 101, 371–398.CrossRefGoogle Scholar
Bergin, P. R. and Corsetti, G. (2008) The extensive margin and monetary policy. Journal of Monetary Economics 55(7), 1222–1237.CrossRefGoogle Scholar
Bethune, Z. (2017) Consumer Credit, Unemployment, and Aggregate Labor Market Dynamics. Working Paper.Google Scholar
Bethune, Z., Rocheteau, G. and Rupert, P. (2015) Aggregate unemployment and household unsecured debt. Review of Economic Dynamics 18(1), 77–100.CrossRefGoogle Scholar
Bilbiie, F. O., Ghironi, F. and Melitz, M. J. (2012) Endogenous entry, product variety, and business cycles. Journal of Political Economy 120(2), 304–345.CrossRefGoogle Scholar
Branch, W. A. and Silva, M. (2019). Unemployment and the Stock Market when Households Lack Commitment. Working Paper.Google Scholar
Broda, C. and Weinstein, D. (2010) Product creation and destruction: Evidence and price implications. American Economic Review 100, 691–723.CrossRefGoogle Scholar
Cacciatore, M. (2014). International trade and macroeconomic dynamics with labor market frictions. Journal of International Economics 93(1), 17–30.CrossRefGoogle Scholar
Cohen-Cole, E., Duygan-Bump, B. and Montoriol-Garriga, J. (2009). Forgive and forget: Who gets credit after bankruptcy and why? In: EFA 2009 Bergen Meetings Paper. CrossRefGoogle Scholar
Crossley, T. F., Low, H. and O’Dea, C. (2013) Household consumption through recent recessions*. Fiscal Studies 34(2), 203–229.CrossRefGoogle Scholar
Haan, W. J.den, Ramey, G. and Watson, J. (2000) Job destruction and propagation of shocks. American Economic Review 90(3), 482–498.CrossRefGoogle Scholar
Dixit, A. K. and Stiglitz, J. E. (1977) Monopolistic competition and optimum product diversity. The American Economic Review 67(3), 297–308.Google Scholar
Durkin, T. A., Elliehausen, G., Staten, M. E. and Zywicki, T. J. (2014) Consumer Credit and the American Economy. New York, NY: Oxford University Press.CrossRefGoogle Scholar
Fujita, S. and Ramey, G. (2007) Job matching and propagation. Journal of Economic Dynamics and Control 31(11), 3671–3698.CrossRefGoogle Scholar
Fulford, S. L. (2015) How important is variability in consumer credit limits? Journal of Monetary Economics 72, 42–63.CrossRefGoogle Scholar
Furletti, M. J. (2003) Consumer Bankruptcy: How Unsecured Lenders Fare. Federal Reserve Bank of Philla Payment Cards Center Discussion Paper (03-17).CrossRefGoogle Scholar
Hall, R. E. (2017). High discounts and high unemployment. American Economic Review 107(2), 305–330.CrossRefGoogle Scholar
Hall, R. E. and Milgrom, P. R. (2008) The limited influence of unemployment on the wage bargain. American Economic Review 98(4), 1653–1674.CrossRefGoogle Scholar
Hamilton, J. D. (2018) Why you should never use the hodrick-prescott filter. Review of Economics and Statistics 100(5), 831–843.CrossRefGoogle Scholar
Herkenhoff, K. F. (2019) The impact of consumer credit access on unemployment. The Review of Economic Studies 86(6), 2605–2642.CrossRefGoogle Scholar
Huo, Z. and Ríos-Rull, J.-V. (2016) Financial Frictions, Asset Prices, and the Great Recession. CEPR Discussion Papers: No. DP11544.CrossRefGoogle Scholar
Jermann, U. and Quadrini, V. (2012) Macroeconomic effects of financial shocks. The American Economic Review 102(1), 238–271.CrossRefGoogle Scholar
Kehoe, T. J. and Levine, D. K. (1993) Debt-constrained asset markets. The Review of Economic Studies 60(4), 865–888.CrossRefGoogle Scholar
Koop, G., Pesaran, M. and Potter, S. M. (1996) Impulse response analysis in nonlinear multivariate models. Journal of Econometrics 74(1), 119–147.CrossRefGoogle Scholar
Laing, D., Li, V. E. and Wang, P. (2007) Inflation and productive activity in a multiple-matching model of money. Journal of Monetary Economics 54(7), 1949–1961.CrossRefGoogle Scholar
Lee, D. and Van der Klaauw, W. (2010) An Introduction to the Frbny Consumer Credit Panel. Technical report, Federal Reserve Bank of New York Staff Report.CrossRefGoogle Scholar
Lewis, V. (2009) Business cycle evidence on firm entry. Macroeconomic Dynamics 13(5), 605–624.CrossRefGoogle Scholar
Livshits, I., MacGee, J. and Tertilt, M. (2007) Consumer bankruptcy: A fresh start. The American Economic Review 97(1), 402–418.CrossRefGoogle Scholar
Mian, A. and Sufi, A. (2010) The great recession: Lessons from microeconomic data. American Economic Review 100(2), 51–56.CrossRefGoogle Scholar
Mian, A. and Sufi, A. (2011) House prices, home equity-based borrowing, and the us household leverage crisis. American Economic Review 101(5), 2132–2156.CrossRefGoogle Scholar
Mortensen, D. T. and Pissarides, C. A. (1994) Job creation and job destruction in the theory of unemployment. The Review of Economic Studies 61(3), 397–415.CrossRefGoogle Scholar
Nosal, E. and Rocheteau, G. (2011) Money, Payments, and Liquidity. MIT press.Please provide publisher location for “Nosal and Rocheteau (2011).”CrossRefGoogle Scholar
Petrosky-Nadeau, N. and Wasmer, E. (2015) Macroeconomic dynamics in a model of goods, labor, and credit market frictions. Journal of Monetary Economics 72, 97–113.CrossRefGoogle Scholar
Schaal, E. and Taschereau-Dumouchel, M. (2016) Aggregate Demand and the Dynamics of Unemployment. Working Papers: No. 1–41.Google Scholar
Shao, E. and Silos, P. (2013) Entry costs and labor market dynamics. European Economic Review 63, 243–255.CrossRefGoogle Scholar
Shimer, R. (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95(1), 25–49.CrossRefGoogle Scholar
Silva, J. I. and Toledo, M. (2009) Labor turnover costs and the cyclical behavior of vacancies and unemployment. Macroeconomic Dynamics 13(S1), 76–96.CrossRefGoogle Scholar
Silva, M. (2017) New monetarism with endogenous product variety and monopolistic competition. Journal of Economic Dynamics and Control 75, 158–181.CrossRefGoogle Scholar
Sullivan, J. X. (2008) Borrowing during unemployment unsecured debt as a safety net. Journal of Human Resources 43(2), 383–412.CrossRefGoogle Scholar
Supplementary material: PDF

Silva Supplementary Materials

Silva Supplementary Materials

Download Silva Supplementary Materials(PDF)
PDF 1.1 MB