Land Collateral and Labor Market Dynamics in FranceReport as inadecuate

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1 University of Konstanz 2 GREQAM - Groupement de Recherche en Économie Quantitative d-Aix-Marseille 3 Centre de recherche de la Banque de France

Abstract : The value of land in the balance sheet of French firms correlates positively with their hiring and investment flows. To explore the relationship between these variables, we develop a macroeconomic model with firms that are subject to both credit and labor market frictions. The value of collateral is driven by the forward-looking dynamics of the land price, which reacts endogenously to fundamental and non-fundamental (sunspot) shocks. We calibrate the model to French data and find that land price shocks give rise to significant amplification and hump-shaped responses of investment, vacancies and unemployment that are in line with the data. We show that both the endogenous movements in the firm’s discount factor and the sluggish response of the land price are key elements that drive the results.

Keywords : financial shocks labor market frictions

Author: Leo Kaas - Patrick A. Pintus - Simon Ray -



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