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Collateral crises and unemployment

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  • Eric Tong

Abstract

Inspired by the sudden devaluation of ‘safe’ assets at the dawn of crisis, I build a model that features collateralisation in the financial market, and search frictions between employers and workers in the labour market. The model identifies a collateral quality threshold, below which banks switch from unconditional lending to lending contingent on receiving good collateral. The switch explains why a small shock in the collateralised market may lead to sharp losses in job vacancies, such as that seen in the 2008 Great Recession. A trade-off is identified between the proximity and severity of a collateral crisis. Policymakers may manipulate the trade-off, but they cannot eliminate it.

Suggested Citation

  • Eric Tong, 2018. "Collateral crises and unemployment," New Zealand Economic Papers, Taylor & Francis Journals, vol. 52(1), pages 72-90, January.
    • Handle: RePEc:taf:nzecpp:v:52:y:2018:i:1:p:72-90
    DOI: 10.1080/00779954.2016.1230642
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    References listed on IDEAS

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