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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.
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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

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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.

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