We study a model with heterogeneous producers that face collateral and cash in advance constraints. These two frictions give rise to a non-trivial financial market in a monetary economy. A tightening of the collateral constraint results in a credit-crunch generated recession. The model can...

Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate and micro-level implications of a credit crunch—i.e., a sudden tightening of collateral constraints. When we simulate a...

Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate and micro-level implications of a credit crunch--i.e., a tightening of collateral constraints. When we simulate a credit...