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Employment and output effects of financial shocks

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  • Hoang Khieu

    (Johannes Gutenberg University)

Abstract

This paper develops a New Keynesian model featured with financial frictions in the form of an exogenous credit constraint to explore the employment and output effects of financial shocks. I show that the equity payout adjustment costs are crucial for the transmission mechanism of financial shocks. The model is estimated using the Bayesian methods and simulated using the observed exogenous shocks for two periods, 1954:III–1983:IV and 1984:I–2015:I. Overall, it is found that financial shocks can account for the observed dynamics of employment and output, especially the sharp decreases during the Great Recession 2007–2008. Additionally, the financial shock is the third and second biggest contributor to output and employment variations, respectively, in the earlier period, but it turns out to be the main source of employment and output fluctuations in the later period. I find that firms are faced higher equity payout adjustment costs in the period 1984:I–2015:I, which accounts for greater variations in the equity payouts in the period.

Suggested Citation

  • Hoang Khieu, 2018. "Employment and output effects of financial shocks," Empirical Economics, Springer, vol. 55(2), pages 519-550, September.
    • Handle: RePEc:spr:empeco:v:55:y:2018:i:2:d:10.1007_s00181-017-1284-8
    DOI: 10.1007/s00181-017-1284-8
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    1. António Afonso & M. Carmen Blanco-Arana, 2021. "Unemployment and financial development: evidence for OECD countries," Working Papers REM 2021/0204, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Friedrich Lucke, 2022. "The Great Moderation and the Financial Cycle," Working Papers REM 2022/0238, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    Financial shocks; Exogenous credit constraint; Equity payout adjustment costs; New Keynesian;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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