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"We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model"--National Bureau of Economic Research web site

We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, and (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange-rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union. (JEL E12, E24, E52, E63, F31, F33, F41)