Ji, Yan and Zhibo, Tan, Does a Flexible Labor Market Amplify the Impact of a Credit Crunch? (February 1, 2015). Available for download at SSRN: http://ssrn.com/abstract=2558864

“We demonstrate that a flexible labor market amplifies the impact of a credit crunch on the duration of a recession through the credit trap channel. We illustrate this channel’s mechanism and quantitatively evaluate its importance using a calibrated general equilibrium model with heterogeneous agents. We provide empirical support for the theoretical predictions using data from 65 countries over the period 1960-2011, which reveals that the duration of the recession with a credit crunch is significantly longer when the labor market is more flexible. However, a flexible labor market does not increase the duration of a recession significantly in the episodes with positive credit growth.”