Financial shocks, cyclicality of labor productivity and the great moderation /

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Bibliographic Details
Author / Creator:Zandvakil, Rasool, author.
Ann Arbor : ProQuest Dissertations & Theses, 2016
Description:1 electronic resource (55 pages)
Format: E-Resource Dissertations
Local Note:School code: 0330
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Other authors / contributors:University of Chicago. degree granting institution.
Notes:Advisors: Lars Peter Hansen Committee members: Anil Kashyap; Stavros Panageas; Amit Seru.
Dissertation Abstracts International, Volume: 77-08(E), Section: A.
Summary:The nature of the business cycle has changed sharply since the onset of the "great moderation"---with decline in output volatility coinciding with vanishing pro-cyclicality of labor productivity. To provide a unifying theory for these patterns I combine the insights of the real business cycle (RBC) theory, which features productivity shocks that lead to pro-cyclicality of labor productivity, with the recent work on labor and finance. In my model, the firm needs to finance its wage bill and capital in advance by borrowing against its assets before its revenues are realized. The basic intuition that overturns the prediction of an RBC model---namely, a negative productivity shock reduces both output and labor productivity---is that a negative financial shock tightens the borrowing constraint of firms, which lowers labor demand because the wage bill has to be financed in advance, and thus raises labor productivity. Therefore, the increase in the importance of financial shocks relative to TFP shocks implies a decline in the pro-cyclicality of labor productivity, an increase in the volatility of hours relative to output, and a decline in the correlation between labor productivity and hours. I quantitatively assess the importance of this mechanism in a DSGE model with borrowing-constrained entrepreneurs facing both financial shocks and TFP shocks. I estimate the model and show that increased quantitative importance of financial shocks captures the sharp changes brought about by the great moderation. There is some empirical support for this mechanism in the cross-section of 12 OECD countries.