Credit, Vacancies and Unemployment Fluctuations

Propagation in equilibrium models of search unemployment is significantly altered when vacancy costs require some external financing on frictional credit markets. The easing of financing constraints during an expansion reduces the opportunity cost of resources allocated to job creation, raising the elasticity of market tightness through (i) a cost channel, increasing incentive to recruit for a given benefit from a new hire; (ii) a wage channel, whereby an improved bargaining position of firms limits the upward pressure of market tightness on wages. The calibrated model can match the volatility and persistence of market tightness observed in the data.