A liquidity crunch in an endogenous growth model with human capital. (14th November 2021)

• Record Type: Journal Article
• Authors: Salas, Sergio
• Is Part Of: Southern economic journal. Volume 88:Number 3(2022)
• Page Start: 1199
• Page End: 1238
• Publication Date: 2021-11-14
• Subjects: endogenous growth -- human capital -- liquidity crises; Southern States -- Economic conditions -- Periodicals; Economics -- Periodicals; Economic history; Economics; Southern States; Periodicals; 330.975005
• DOI: 10.1002/soej.12549
• Languages: English
• ISSNs: 0038-4038

Abstract

Abstract: There is by now reasonable evidence that supports the notion of a trend break in the U.S. GDP since the Great Recession. To explain this phenomenon, I construct a version of the Lucas endogenous growth model, amplified with financial frictions and financial disruptions in the firms' sector. I then show how a transitory liquidity crunch is capable, at least qualitatively, of producing a similar pattern of a persistent downward shift in the GDP trend as one could infer happened in the United States since 2008. The main mechanism by which such a result is found relies on workers' decisions on providing labor to firms versus accumulating human capital. I show that a transitory liquidity crunch reduces the demand of labor. Workers anticipating a phase of depressed wages make the decision of accumulating more human capital in the short run, thereby reducing labor supply to firms. In the long run, however, incentivized by a strong recovery, workers decrease human capital accumulation and increase labor supply. Under plausible parameterizations of the model, this situation produces a net effect of a decrease in overall productivity that permanently reduces the trend at which the economy was growing prior to the crisis.