By Dennis Wesselbaum
This paper establishes a link between labor market frictions and financial market frictions. We present empirical evidence about the relation between search and financial frictions. Then, we build a stylized DSGE model that features this channel. Simulation excercises show that the model with this channel generates a strong internal propagation mechanism, replicates stylized labor market effects of the Great Recession, and, most importantly, creates a jobless recovery.
Nice to see a paper that ties together the jobless recoveries of the last few cycles with the financial frictions that have been so important in the last one.