Faculty of Economics and Business Administration Publications Database

Land collateral and labor market dynamics in France

Pintus, Patrick A.
Ray, Simon
Volume: 84
Pages: 202 - 218
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2016
Keywords: Financial shocks; Labor market frictions

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 firms׳ discount factor and the sluggish response of the land price are key elements that drive the results.