Monetary and fiscal policies in a search and matching

model with endogenous growth

Ekkehard Ernst∗
OECD
Economics Department
2, Rue André Pascal
75775 Paris Cedex 16
[email protected]

Summer 2006

Abstract

Search and matching frictions on financial and labor markets are introduced in a
dynamic general equilibrium framework, affecting the dynamics of capital and employ-
ment adjustments. While prices are fully flexible and determined by money supply,
money demand arises endogenously from financial market matching frictions that pre-
vent some deposits from being channeled into productive investment. This allows
monetary policy to affect household’s portfolio decisions with repercussions on steady
state output and employment growth. In particular, an optimal, growth maximizing
inflation rate is shown to exist when financial market liquidity affects the steady state
rate of capital accumulation balancing the portfolio shift induced by a higher inflation
rate with an overall lower rate of return on total wealth. In addition, fiscal policy is
shown to be growth-enhancing to the extent that it helps to overcome some of the
externality problems that search frictions create by providing additional assets on the
financial market. Finally, the paper explores the interaction between monetary and
fiscal policies showing that monetary policy can reinforce the positive effects of fiscal
policy.

Keywords: Financial and labor market matching frictions, optimal monetary pol-
icy, optimal taxation, monetary and fiscal policy interactions, endogenous growth

JEL-Classification: E44, E52, E63, G11, J63

∗
Many thanks to participants at the 14th Meeting of the Society for Nonlinear Dynamics and Econometrics
in St. Louis. The views expressed in this paper are those of the author and do not necessarily reflect those
of the OECD.
1
1 Introduction
Short-term macroeconomic analysis has made substantial progress with the onset of the
New Keynesian macroeconomic paradigm, considering imperfections on product and labour
market as essential to understand inflation and output persistence. While the original work
has been mainly concerned with labour and product market imperfections, the paradigm
has been extended in the meantime to consider the role of financial market frictions in the
transmission of monetary shocks, such as in the limited participation models that have first
been introduced by Lucas (1990), Christiano (1991) and Fuerst (1992) in order to consider
the supply side effects of changes in the monetary policy stance and to better account for
certain macroeconomic dynamics that sticky price models were unable to represent properly
(Christiano, Eichenbaum, Evans, 1996).
One simple, alternative way of introducing imperfect financial markets in an otherwise
standard macro-model is to consider search frictions that extend to financial markets in a
similar fashion as the - by now standard - set-up of search frictions on labour markets. This
allows a natural role for financial intermediaries and costly adjustment of capacity depending
on the liquidity of financial markets. Such a framework would allow to mimic limited par-
ticipation as part of the funds are not being funnelled to productive investments but stuck
in the matching process, while on the other hand providing some appealing characteristics
both methodologically and theoretically.
The methodological advantages of a search-theoretic approach lie in the parametric nature
of its rigidities that can be modelled by references to the parameters both of the matching
function and of the institutional framework in which the economy operates. In this regard,
the matching approach has made strong inroads into labour economies precisely because it
adopts a black-box approach that avoids introducing real and nominal rigidities in an ad hoc
manner. Hence, methodologically such a generalised search approach would be attractive as
it would stay away from mixing parametric and ad hoc forms of rigidities such as those in
the current New Keynesian macroeconomics literature.
Theoretically, such an approach could prove fruitful due to the specific set-up of search
models: the stock-flow link for each individual decision economic agents make in these
models. This stock-flow link is a peculiar feature of the search literature - in contrast to the
competitive RBC world where households will invest in only one asset - as every decision (to
work, to open a vacancy, to supply funds, to search for a new product) is modelled in terms
of an asset that is being accumulated (the expected discounted wealth of a wage contract,
the expected net present value of a filled job, etc.) through an investment decision. These
models allow for far more different types of liquidity effects than in the standard literature
creating new interesting transmission mechanisms of shocks (see for a recent example, Wang
and Xie, 2003). In particular, labour supply and savings decisions no longer depend only on
current wages, prices and interest rates but on the future expected liquidity of the labour
and financial markets.

2
 Based on such a framework with search and matching on financial markets, money de-
mand arises naturally in the model of this paper without any additional assumptions regard-
ing cash-in-advance or the Sidrauskian ”money in the utility function” hypotheses. This al-
lows us to formulate straightforwardly an optimal money supply rule against which different
monetary policy regimes must be assessed. In addition, the characteristics and determining
factors of such a rule can be analysed, in particular the impact of endogenous (AK-)growth,
and possible Mundell-Tobin liquidity effects on growth.
Similar to the role of money in the growth process, fiscal policy - in particular the financ-
ing side of fiscal policy - can occupy a central role in models where perfect intermediation
between deposits and bonds do not exist. Here, we consider a model where government is
perfectly social waste but where government activity in form of the financing through taxes
or bonds can modify the optimal growth path. Government spending needs to be backed
by taxation (at least in the Ricardian set-up that is considered here) but government bonds
will provide liquidity to the financial market that raises incentives for households to save
and deposit money rather than to consume their income. Hence, there will be an optimal
tax-bond equilibrium with non-trivial public debt such as to maximise the optimal growth
path.
The chapter starts with the introduction of the necessary modelling concepts to analyse
search and matching on both labour and financial markets, based on earlier work by Pis-
sarides (2000), Becsi, Li and Wang (2000), Den Han, Ramey and Watson (1999) and Wasmer
and Weil (2004). Introducing intertemporally optimising households and firms, the financial
and labour market equilibria are determined, first in a stationary model without growth and
then in an endogenous growth model based on a simple AK-growth mechanism. Section 5
looks at the impact of both structural and macroeconomic policies. In particular, it is shown
that due to the ambiguous role played by the inflation rate, an optimal, positive inflation
rate is shown to exist that balances the direct negative impact of inflation on growth with
its positive impact on financial market liquidity through the household’s portfolio decisions.
A similar effect can be shown to exist for tax-financed public debt, albeit being limited to
a particular sub-set of financial market equilibria. Finally, a positive interaction between
monetary and fiscal policy can be demonstrated. In the appendix, a first attempt to assess
the out-of-equilibrium dynamics is undertaken based on a calibrated discrete-time version of
the model and its reaction to monetary policy and technology shocks.

2 Financial and labour market search

Three types of agents are considered: entrepreneurs, workers and financiers. Entrepreneurs
have ideas but cannot work in production and possess no capital. Worker transform en-
trepreneurs’ ideas into output but have neither entrepreneurial skills nor capital; financiers
(or bankers) have access to the financial resources required to implement production but
cannot be entrepreneurs nor workers. A productive firm is thus a relationship between an
3
entrepreneur, a financier and a worker. In the following, decentralised economy, however,
only the optimal program of firms and households are considered, the activitiy of financial
investors in intermediating deposits into bonds is assumed to be summarised in a matching
function of the financial market.
Labor market frictions are present under the form of a matching process à la Pissarides
(2000), with a constant returns matching function1 mL (s · U, V). Matches between workers
and firms depend on job vacancies V, unemployed workers U and workers’ search intensity
s. From the point of view of the firms, labor market tightness is measured by θ ≡ V/U .
Labor market liquidity will be 1/θ. The instantaneous probability of finding a worker is thus
mL (s · U, V) /V = mL (s/θ, 1) ≡ q (θ, s), qθ (θ, s) < 0 while for the worker the instantaneous
probability to find a firm writes as mL (s · U , V) /U = mL (s, θ) ≡ θq (θ, s), ∂(θq(θ,s))
∂θ
> 0.
Moreover, we have qs (θ, s) > 0. Finally, the aggregate matching process yielding N filled
jobs, and normalising the labour force to unity, i.e. L = 1, we have U = L − N ⇒ ul ≡
L−N
L
= 1 − n, with n ≡ NL .
Similarly, increasing its capital stock, a firm needs to find a financing source (all finance
is supposed to be external) on financial markets, which are subject to search frictions as
well. In parallel to labour market search, matching on financial market is characterised
by the constant returns matching function mB (D, B) where D is the deposit amount by
households to be intermediated into entreprises’ bonds B to finance an increase of their
capital stock. From the point of view of firms, credit market tightness is measured by
φ ≡ B/D and 1/φ is an index of credit market liquidity, i.e. the ease with which entrepreneurs
can find financing. The instantaneous probability that an entrepreneur will find a banker is
mB (D, B) /B = mB (1/φ, 1) ≡ p (φ). This probability is increasing in credit market liquidity,
i.e. p (φ) < 0.

3 The macroeconomy

3.1 Households

Households’ wealth is hold either in pyhsical capital, government bonds or money. The
economy’s national accounts, therefore, write (in real terms) as:

Assets Liabilities
K: Physical capital W: Households’ wealth
B: Government bonds
M: Real money balances

Money demand arises endogenously in this model as search friction on the financial
market put a wedge between households’ deposits, D, and their transformation into interest
1
mL has positive and decreasing marginal returns on each input.
4
bearing titles (either equity, E, or government bonds, B). Hence, an ”unemployment rate”
of unmatched financial assets can be defined as: uf = W −(K+B)
W
=WM
. Households hold part
of ther financial wealth (b) in government bonds, the rest is invested in equity ((1 − b)), i.e.
K = (1 − b) 1 − uf W and B = b 1 − uf W .
Households earn different returns on the three assets, denoted as rK , rB and rM . Real
money balances do not earn interest but depreciate with the inflation rate, π, hence rM = −π.
Moreover, households have to pay taxes on capital income (supposed to apply only on income
earned from physical capital investment, not on government bonds), hence the after tax rate
of return on capital holdings write as rK = (1 − τ K ) rK , with τ K : taxes on capital income.
Finally, in the absence of stochastic returns, the equilibrium condition for households to hold
either bonds or financial assets in non-trivial amounts requires that the after-tax return on
investment on each of the two assets are equal, i.e. rK = rB ⇔ rK (1 − τ K ) = rB .
Households acccumulate wealth through deposits Dt = Y −c with income generated from
asset returns and gainful employment Y = rW W + (1 − τ w ) wN, with τ w : taxes on labour
income, but have to spend search costs on labour markets2 , assumed to be proportional to
their expected net wage and the labour market tightness, 1 − N :
Ẇ = [rK (1 − τ K ) (1 − b) + rB b] 1 − uf − πuf W + (1 − τ w ) wN
−c − wΦ (s) (1 − N ) (1)

Besides wealth, households decide on their search effort, s, on labour markets to find a
suitable job, thereby taking the evolution of employment into account, which is given by:
Ṅ = mL (s, θ) (1 − N ) − σN (2)
where σ: the rate of job destruction assumed to be exogenously given.
Households, then, maximise their interetemporal utility depening3 on consumption, ct
and employment, Nt , choosing consumption, labour market search effort and deposits ac-
cording to
∞
max U (ct , Nt ) e−ρt
ct ,st ,Dt 0
s.t. (1) and (2)

Assuming a CRRA contemporaneous utility function with risk aversion η and 1/χ : the
Frisch labour supply elasticity with respect to wages, the Hamiltonian writes as4 :
c1−η N 1+χ
H = − + ν 2 mL (s, θ) (1 − N) − σN
1−η 1+χ
2
Search costs are opportunity costs in terms of utility forgone.
3
In this model, government spending is assumed to be socially wasteful, not adding to utility or the
production function.
4
Alternatively the contemporaneous utility function:
c1−η χ
·
1−η N
5
 +ν 1 [rK (1 − τ K ) (1 − b) + rB b] 1 − uf W − πuf W − c
+ (1 − τ w ) wN − wΦ (s) (1 − N)} .

The household’s first-order conditions can then be determined as:

∂H
= 0 ⇔ c−η = ν 1 (3a)
∂c
∂H
= 0 ⇔ ν 1 wΦ (s) = ν 2 mLs (s, θ) (3b)
∂s

The co-state variables B and n evolve according to:

∂H
ν̇ 1 = ρν 1 − = ρν 1 − ν 1 [rK (1 − τ K ) (1 − b) + rB b] 1 − uf − πuf
∂W
= ν1 ρ − rK (1 − τ K ) 1 − uf + πuf (4a)
∂H
ν̇ 2 = ρν 2 − = ρν 2 + N χ − ν 1 w (Φ (s) + 1 − τ w ) + ν 2 σ + mL (s, θ) (4b)
∂N

Deriving (3a) with respect to time and substituting ν̇ 1 and ν 1 in (4a), the household’s
optimal consumption path can be determined as:

−η ċc−η−1 = c−η ρ − rK (1 − τ K ) 1 − uf + πuf

ċ 1
⇔c≡ = rK (1 − τ K ) 1 − uf − πuf − ρ (5)
c η

Labour supply - determined indirectly through the search effort s - can then be deter-
mined similarly by substituting out ν 1 in (3b) and (4b) and taking derivatives of (3b) with
respect to time. In steady state, the optimal search effort s∗ has therefore to satisfy the
following equation:

Φ (s) L N χ cη
ρ + σ + m (s, θ) − Φ (s) = w − .
mLs (s, θ) 1 − τw

These two optimality conditions lead to the following proposition:

Proposition 1 In steady state, growth increases with the rate of return on capital and de-
creases with capital taxes, inflation and unmatched financial resources. Moreover, search
effort decreases with income taxation, but increases with wages, labour market tightness and
total employment.
could have been used which would lead to non-separability of the employment and consumption decision.
However, the characteristics of employment lotteries would have been lost (see Merz, 1995).

6
3.2 Firms

In order to determine the equilibrium on financial and labour markets, we need to turn,
now, to the optimal program of the firm. In the production process, jobs disappear with
rate σ and capital depreciates at rate δ. Assuming labour-saving technological progress, A,
the firm’s constant-returns-to-scale production function writes as:

F = F (K, AN) , FK > 0, FN > 0, FKK < 0, FNN < 0.

The firm maximises profits selecting vacancies, V ≥ 0, and issues of bonds, B ≥ 0, subject
to costs of job vacancy creation, ζ · wV, and finding a financial investor, κ · rB. Accordingly,
its optimal program writes as:
∞
max ν 1 (t) (F (K, AN ) − wN − rK K − ζ · wV − κ · rK B) e−ρt dt
V,B 0

where ρ stands for the intertemporal preference rate and ν 1 (t) for the household’s shadow
variable related to its accumulation constraint5 , which firms maximise against the constraints
of employment and capital accumulation:

Ṅ = q (s, θ) V − σN
K̇ = p (φ) B − δK.

The Hamiltonian therefore writes as:

H = ν 1 (t) [F (K, N ) − wN − rK K − ζ · wV − κ · rK B] + λ [q (θ) V − σN ] + µ [p (φ) B − δK]

leading to the first-order conditions:

∂H ζ ·w
= 0 ⇔ ζ · w = λq (θ) ⇔ λ = ν 1 (t)
∂V q (θ)
∂H κ · rK
= 0 ⇔ κ · r = µp (φ) ⇔ µ = ν 1 (t)
∂B p (φ)

and the evolution of the co-state variables:

∂H
λ̇ = ρλ − = λ (ρ + σ) − ν 1 (t) (FN − w)
∂N
∂H
µ̇ = ρµ − = µ (ρ + δ) − ν 1 (t) (FK − rK )
∂K
5
This follows the spirit of Merz (1995) determination of the competitive search equilibrium (see Merz,
1995, pp. 287-293). It is, indeed, easy to show that this formulation is equivalent to the one where the
intertemporal preference rate for firms is replace by the - commonly used - interest rate for capital. In both
cases, it is assumed that capital is ultimately owned by households.

7
 Deriving the first-order conditions with respect to time, one obtains:
ζ · ẇ ζ ·w
λ̇ = + ν̇ 1 (t)
q (θ) q (θ)
κ · ṙK κ · rK
µ̇ = + ν̇ 1 (t)
p (φ) p (φ)
and hence:
ζ · ẇ ζ ·w ζ ·w
ν 1 (t) + ν̇ 1 (t) = ν 1 (t) (ρ + σ) − ν 1 (t) (FN − w)
q (θ) q (θ) q (θ)
κ · ṙK κ · rK κ · rK
ν 1 (t) + ν̇ 1 (t) = ν 1 (t) (ρ + δ) − ν 1 (t) (FK − rK )
p (φ) p (φ) p (φ)
which can be rewritten as:
w + ν 1 (t) − ρ − σ
FN − w + ζw = 0
q (θ)
rK + ν 1 (t) − ρ − δ
FK − rK + κrK = 0
p (φ)

Wages and interest rates are negociated on labour and financial markets respectively.
Workers enjoy bargaining power β, financial investors pressure for interest rates with bar-
gaining power γ. In order to simplify the bargaining process, we will follow Eriksson (1997),
here assuming that the bargaining power describes the bounds between which wages and
interest rates have to fall:

• Wages will be determined as a weighted average of marginal productivity, FN , and the

gain of filling a vacancy on the one hand, θζ 0 , and unemployment benefits, R0 , on the
other:
w = β (FN + θζ 0 ) + (1 − β) R0 .
• Interest payment will be determined as a part of the marginal productivity of capital
and the gain of matching issued debt, assuming that the fall-back option for financial
investors is zero (we are assuming a closed economy here):
rK = γ (FK − δ + φκ0 ) .

Then, capturing the increase in productivity, which will affect the increase in the reser-
vation wage, the vacancy costs and the costs of scheduling new debt over time, we write
R0 = R · w (0 ≤ R < 1), ζ 0 = ζ · w and κ0 = κ · rK , and can therefore reformulate the two
prices as:
β
w = β (FN + θζ · w) + (1 − β) R · w ⇔ w = FN (6)
1 − βθζ − (1 − β) R
γ
rK = γ (FK − δ + φκ · rK ) ⇔ rK = (FK − δ) (7)
1 − γφκ
8
 Here, the first conditions describes the job creation condition, while the second determines
the capital accumulation condition. As in the single-matching case (with matching only on
the labour market), the equilibrium can then be determined by way of reference to the wage
and interest curves, (6) and (7). Moreover, the unused reserves on labour and financial
markets, ul and uf , can be determined, by way of equalizing inflows and outflows on both
markets:

1. On financial markets, in each period uf · φp (φ) gets matched, but 1 − uf δ quit the
market, where uf as defined above. Hence, in equilibrium:
1 − uf δ = uf · φp (φ)
δ
uf =
δ + φp (φ)

2. On labour markets, in each period ul · θq (θ) gets matched, but 1 − ul σ quit the
market. Hence, in equilibrium:
1 − ul σ = ul · θq (θ)
σ
ul =
σ + θq (θ)
1
Denoting k = K/ (AN) and f (k) = AN
F (K, AN ), the firm’s first-order conditions can
be rewritten in intensive form as:
σ+ρ−w ζ ·w
ν 1 (t) (f (k) − kf (k)) − w − ζ · w + ν̇ 1 (t) = 0
q (θ) q (θ)
δ + ρ − rK κ · rK
ν 1 (t) f (k) − rK − κ · rK + ν̇ 1 (t) = 0
p (φ) p (φ)
and the wage and interest curve write as:
β
w = (f (k) − kf (k)) (8)
1 − βθζ − (1 − β) R
γ
rK = f (k) (9)
1 − γφκ

This can be used to determine the steady-state equilibrium (θ, φ) where rK = 0 and
ν 1 (t) = c−η ⇒ νν̇ 11 (t)
(t)
= −η cċ :
ζβ ċ
(1 − β) (1 − R) − βθζ − σ+ρ−w+η = 0 (10)
q (s, θ) c
κγ ċ
1 − γ (1 + φκ) − · δ+ρ+η = 0 (11)
p (φ) c
relating θ and φ to the model’s fundamentals. Moreover, under the assumption that interest
rates are fixed on world markets, equation (8) will also allow to determine the optimal
capital-labour intensity.
9
4 Growth and matching
The solutions of the households’ and firm’s first-order conditions can be taken together to
yield the values of the endogenous variables in steady state, in particular relating growth
and matching values on financial and labour markets. Three cases will be distinguished in
the following: (i) no growth, (ii) positive growth exogenously given, (iii) endogenous growth.

4.1 Steady state in the no-growth equilibrium

When long-term per capita growth is zero, we have ċc = w = 0 and A = A0 = const. From
(1), (5), (8), (9), (10), (11), the steady state values of the vector {φ, r, θ, k, N, s, w, c} can
hence be determined recursively as (where uf = uf (φ∗ ) and ul = ul (θ ∗ )):
κγ
φ∗ : 1 − γ (1 + φ∗ κ) − · (δ + ρ) = 0
p (φ∗ )
ρ
r∗ : r ∗ =
1 − uf
ζβ
θ∗ : (1 − β) (1 − R) − βθ ∗ ζ − (σ + ρ) = 0
q (s∗ , θ ∗ )
1 − γφ∗ κ ∗
k ∗ : f (k ∗ ) = r
γ
mL (s∗ , θ∗ )
N∗ : N∗ = ⇒ K ∗ = A0 k ∗ N ∗
σ + mL (s∗ , θ ∗ )
Φ (s∗ ) ∗ ∗ (N ∗ )χ
s∗ : ρ + σ + mL
(s , θ ) − Φ (s ∗
) = 1 −
mLs (s∗ , θ∗ ) [(1 − τ w ) (w∗ /c∗ )]η
β
w∗ : w∗ = ∗ (f (k ∗ ) − k ∗ f (k ∗ )) ⇒ Y ∗ = w∗ N ∗
1 − βθ ζ − (1 − β) R

Note that it can be shown that with constant-returns-to-scale matching functions mB and
mL , φ∗ and θ ∗ are unique solutions to their steady-state equations.
Moreover we have:
δK ∗
K̇ = p (φ) B − δK = 0 ⇒ B∗ =
p (φ∗ )
which yields, together with Ḃ = 0 and K ∗ = 1 − uf a∗ :

c∗ = r∗ K ∗ + Y ∗ − w∗ Φ (s∗ ) (1 − N ∗ ) − ζw∗ θ ∗ ul − κr∗ B∗

κδ
= r∗K ∗ 1 − + w∗ [N ∗ (1 + Φ (s∗ ) + ζθ∗ ) − Φ (s∗ ) − ζθ∗ ] .
p (φ∗ )

10
4.2 Exogenous growth

Once the optimal paths for consumption and labour supply determined, the availability of
financial funds from which firms can draw their resources derives. This can be used to
determine the optimal capital-labour intensity, k, that has been left undetermined in the
model above. Let multi-factor productivity grow at a constant rate g, i.e. A (t) = A0 egt . In
equilibrium, given a constant population, i.e. L̇ = 0, we have:

ċ K̇ Ḃ Ȧ
= = = =g
c K B A

Recall the optimal consumption path from above:

ċ 1
= r 1 − uf − ρ
c η
leading to the steady state interest rate:
ηg + ρ
r∗ =
1 − uf
where φ∗ is determined by (12b) below.
The exogenously given growth rate of consumption, g, together with the interest-rate
curve (9), can be used to define the steady-state capital intensity:
ηg + ρ ! γ
r = f
= f (k)
1−u 1 − γφκ
(ηg + ρ) (1 − γφ∗ κ)
⇒ k ∗ = f −1 .
γ (1 − uf )

Moreover, given the positive growth rate and noting the wages will grow at the same
rate, the labour and financial market liquidities can be solved by:
ζβ
(1 − β) (1 − R) − βθ∗ ζ − (σ + ρ − (1 − η) g) = 0 (12a)
q (s, θ∗ )
κγ
1 − γ (1 + φ∗ κ) − · (δ + ρ + ηg) = 0. (12b)
p (φ∗ )

These steady-state liquidities can be used to derive employment and wages in equilib-
rium:
mL (s∗ , θ∗ )
N∗ = ⇒ K ∗ = At k ∗ N ∗
σ + mL (s∗ , θ∗ )
β
w∗ = ∗ (f (k ∗ ) − k ∗ f (k ∗ )) .
1 − βθ ζ − (1 − β) R
11
 Finally, given that K̇/K = g ⇒ p (φ) B/K − δ = g we have:
B∗ g+δ
∗
= .
K p (φ)

Interestingly, in the exogenous growth case, there is financial market dominance as the
steady state liquidity on financial markets ”runs the show”.

4.3 Endogenous growth with investment externalities

In order to introduce endogenous growth in its simplest form, we will follow Romer (1986)
and consider spillovers from installed capital to the overall economy (scaled by the size of
the economy6 ). Hence, the production function for each single firm i writes as:
α
F (Ki , Ai Ni ) = Ai · K Niα Ki1−α
where K = N −a Ki . Hence, in equilibrium where Ki = Kj , Ni = Nj , i = j, and therefore
1−α
K = NNi Ki with N: total employment, the rate of return on capital writes as:
γ
rK = γ (FK − δ + φκ0 ) ⇔ rK = (A (1 − α) − δ) = const . (13)
1 − γφκ

Moreover, from (5) we know the steady state growth rate to be:
ċ 1
= rK (1 − τ K ) 1 − uf − πuf − ρ
c η
which can be rewritten as:
ċ 1
g= = rK (1 − τ K ) 1 − uf − πuf − ρ (14)
c η
 
f
1  γ (1 − τ K ) 1 − u
= (A (1 − α) − δ) − πuf − ρ
η 1 − γφκ
γ (1 − τ K ) 1 − uf ρ + πuf
= (A (1 − α) − δ) −
η (1 − γφκ) η

Moreover, financial and labour market equilibrium is determined from (10) and (11) as:

 (1 − β) (1 − R) − βθζ − ζβ σ + ρ + η−1 rK (1 − τ K ) 1 − uf − πuf − ρ =0
q(s,θ) η
 1 − γ (1 + φκ) − κγ · δ + ρ + rK (1 − τ K ) 1 − uf − πuf − ρ = 0
p(φ)

 η Θ (θ, β, ζ, R) − γ (A (1 − α) − δ + φκ) (1 − τ K ) 1 − uf = σ + ρ − πuf
η−1 η
⇔ (15)
 Φ (φ, γ, κ) − γ (A (1 − α) − δ + φκ) (1 − τ K ) 1 − uf = δ − πuf

6
The scaling factor is introduced to avoid that the growth rate rises with the size of the economy (Jones,
1995).
12
where Θ (θ, β, ζ, R) = ηq (s, θ) (1−β)(1−R)−βθζ
ζβ(η−1)
, Θθ < 0, Θβ < 0, ΘR < 0, Θζ < 0 and
Φ (φ, γ, κ), Φφ < 0, Φγ < 0, Φκ < 0.

Proposition 2 The growth rate increases unambiguously with both optimal financial mar-
ket liquidity φ∗ . Moreover, financial and labour market liquidity will be determined simul-
taneously by the system (15). In this regard, higher productivity, A, increases (decreases)
unemployment for η > 1 (η < 1).

Proof. The equilibrium interest rate increases linearily with φ at slope γκ. The growth rate, in turn,
is positively affected by an increase in the interest rate and a decrease in the amount of unsed funds that
suffer from the inflation tax:
dg 1 drK duf
= (1 − τ K ) 1 − uf − (rK (1 − τ K ) + π) .
dφ η dφ dφ

5 Structural and macroeconomic policies

5.1 Structural policies

Given real rigidities on labour and financial markets, policy makers can influence the steady
state growth rate by modifying the entry costs for issuing bonds or opening vacancies (κ,
ζ) or by influencing the relative bargaining power on financial and labour markets (γ, β).
Applying Cramer’s rule on the system set up by total differencing (10), (11), (13) and (14),
the following table ensues, summarising the effect of these four parameters on steady state
liquidity of financial and labour markets and the impact on growth in equilibrium

κ ζ γ β
> 0 for η > 1 < 0 for η > 1
θ <0 <0
< 0 for η < 1 > 0 for η < 1
φ <0 =0 <0 =0
< 0 for φ > φ < 0 for φ > φ
r =0 =0
> 0 for φ < φ > 0 for φ < φ
< 0 for φ > φ < 0 for φ > φ
g =0 =0
> 0 for φ < φ > 0 for φ < φ

As already mentionned before, the system is characterised by a triangular structure be-

tween financial and labour market liquidity: While financial markets affect labour markets,
the reverse is not true. This result is a direct consequence of our assumption regarding the
sources of endogenous growth in the production function: In a more sophisticated model,
growth effects from frictions on labour markets that affect returns to human capital invest-
ment may be considered. Notice, morever, that despite an unambiguously negative sign
13
of the financial market sturctural parameters κ and γ on financial market liquidity, their
growth effect are ambiguous and may be positive for low financial market liquidity. This
results from the fact that besides lowering steady state financial market liquidity, they also
impact upon the rate of return on capital - in an ambiguous way.

5.2 Monetary policy

In the case of exogenously given growth, inflation will have no impact on the the rate of
accumulation of household wealth. However, both in the case of exogenous and endoge-
nous growth, the depreciation of real money balances will impact on the portfolio balance
through the financial market liquidity. In particular, financial market tightness will increase
as households prefer to withdraw their funds and to redirect them towards consumption7 .
This follows directly from the equilibrium condition for financial market liquidity (11):
κγ ċ
1 − γ (1 + φκ) − · δ+ρ+η = 0
p (φ) c
κγ
⇔ 1 − γ (1 + φκ) − · δ + rK 1 − uf − πuf = 0. (16)
p (φ)

In the exogenous growth model, this does not have any further consequences. However,
in the endogenous growth model, a reduction in the financial market liquidity will lead to a
rise in the equilibrium before-tax interest rate; this causes the steady state growth rate to
increase. Hence the following proposition can be proven:

Proposition 3 In the exogenous growth case, there is complete dichotomy between growth
rates and the inflation rate (not necessarily between levels and inflation). In the endogenous
growth case, however, for π < π - with π > 0 - the steady state growth rate increases with
the inflation rate but decreases for π > π, leading to a hump shaped impact of inflation on
growth, with π the growth-optimising inflation rate. At this growth-maximising inflation rate,
employment is minimised (maximised) for η > 1 (η < 1).

∂g f
Proof. As seen from (14), inflation has a first-order negative impact on the growth rate: ∂π = − uη
which is independent from the inflation rate. However, inflation also affects financial market liquidity, as an
increase in inflation leads to a portfolio shift by households away from savings towards consumption; totally
differencing the financial market equilibrium condition (16) yields (note that in the following equations
uf ≡ uf (φ∗ ) and rK ≡ rK (φ∗ )):

dφ∗ p (φ∗ ) uf
= >0
dπ p (φ ) (p (φ ) + (1 − uf ) rK − (rK + π) uf ) − p (φ∗ ) (δ + rK (1 − uf ) − πuf )
∗ ∗

As shown before in proposition 2, both the equilibrium interest rate and the growth rate increase with
financial market tightness as less funds are left unused in the household’s deposits (uf decreases with φ).
7
Recall the money demand arises due to search frictions on financial markets not on product markets.
14
Hence, inflation has a positive second-order impact on the growth rate via its impact on the financial market
liquidity.
Combining the impact of inflation on financial market liquidity and financial market liquidity on growth,
the second-order positive effect writes as:

∂g ∂φ p (φ∗ ) uf 1 − uf rK − rK uf
· =
∂φ ∂π η (p (φ ) (p (φ ) + (1 − uf ) rK − (rK + π) uf ) − p (φ∗ ) (δ + rK (1 − uf ) − πuf ))
∗ ∗

uf (φ) p (φ∗ ) uf 1 − uf rK − rK uf
=
η p (φ∗ ) (p (φ∗ ) + (1 − uf ) rK − (rK + π) uf ) − p (φ∗ ) (δ + rK (1 − uf ) − πuf )

The growth-maximising inflation rate, therefore, can be determined as:

∂g ∂φ ∂g
π∈ π · =
∂φ ∂π ∂π
uf p (φ∗ ) 1 − uf rK − rK uf uf
⇔ ∗ ∗ ∗ =
η p (φ ) (p (φ ) + (1 − uf ) rK − (rK + π) uf ) − p (φ ) (δ + rK (1 − uf ) − πuf ) η
p (φ∗ ) 1 − uf rK − rK uf
⇔ =1
p (φ∗ ) (p (φ∗ ) + (1 − uf ) rK − (rK + π) uf ) − p (φ∗ ) (δ + rK (1 − uf ) − πuf )
2
⇔ p (φ∗ ) = p (φ∗ ) δ + rK 1 − uf − πuf
2
p (φ∗ ) − p (φ∗ ) δ + rK 1 − uf
⇔ π= > 0.
−p (φ∗ ) uf

The impact on employment can be determined in a straightforward way by totally differentiating (15).

Similar to the spirit of the original Tobin model, therefore, we get an impact of portfolio
choices on growth that is determined by the inflation rate (Walsh, 2001, ch. 2). However,
due to the still negative impact of inflation on the overall return of the households’ portfolio,
there will only be a certain range of inflation rates for which the impact is positive, hence
to the extent that monetary authorities control the inflation rate directly, there will be a
growth maximising money supply rule. This, in turn, is in line with recent research on search
models focussing on labour market search only and introducing money demand through a
cash-in-advance rule (Wang and Xie, 2003).

Corollary 4 A central bank that only maximises a weighted sum of growth and inflation will
not opt for the growth-maximising inflation rate but a lower one. A central bank that targets
both growth and employment (besides inflation) runs the risk of an indeterminate optimal
inflation rate if η > 1, with one of the equilibria being characterised by an inflationary bias.

As already noted before for empirically plausible values of the intertemporal substitution
elasticity, growth will reduce employment in this model (a result noted earlier by Eriksson,
1997) as a higher interest rate increases the opportunity costs of opening a vacancy. Hence
growth and employment react in opposite ways to an increase in inflation, making the central
bank (possibly) having an inflationary biais should it also target employment (in addition
to output/productivity growth).
15
5.3 The government

The tax structure has in our set-up a particular role to play as taxes on labour and taxes
on capital do not work the same way: Indeed, as can be seen from (14), only capital taxes
will affect the equilibrium growth rates. Labour income taxes, on the other hand, will not
impact on capital accumulation due to the triangular system of the financial and labour
market interactions (financial market liquidity effects the labour market equilibrium but not
vice versa) and will only affect the size of the economy through the labour supply effect.
Similarly to the impact of structural policies, the impact of taxes can be assessed using
the full system of financial and labour market equations. While labour market liquidity
reacts ambiguously with an increase in τ K - it increases for η > 1 and decreases otherwise
- financial market tightness, φ, increases and so do interest rates. This, however, is not
sufficient to soften the first-order impact of taxes on growth with unambiguously declines.
In order to assess the impact of fiscal policy in isolation, we abstract from monetary policy,
setting the inflation rate to zero, i.e. π = 0.

5.3.1 The Ricardian budget regime

In order to assess fully the impact of government activity, however, taxes cannot be consid-
ered in isolation but must be part of the overall budget constraint which - in the Ricardian
case, i.e. in the absence of fiscal dominance - writes as:

G + rB B = T + Ḃ

where T = τ K rK K + τ w wN ≡ τ Y .
With government spending assumed to be constant (G = 0), any increase in government
debt leads to higher interest payments that have to be matched by increases in tax rates,
i.e. in a Ricardian fiscal regime, any increases in the debt service cannot simply be financed
through higher deficits. Moreover, increases in the government deficit will increase financial
market tightness as can be easily seen from the above national accounts: government bonds
compete with bonds issued by firms, i.e. ceteris paribus an increase in government financing
through bonds will raise φ. The optimal tax policy can hence be analysed, as φ raises over
and above the increase due to increased taxes. In this regard, a comparison of a no-tax
regime (τ = 0, φ∗ ) with a regime with positive capital income taxes and positive government
debt (τ > 0, φ∗∗ ), where φ∗∗ > φ∗ due to government bonds, yields the following proposition:

Proposition 5 For sufficiently low equilibrium financial market tightness φ ≤ φ, there exists
an interior value for tax-backed bond financing of government spending (i.e. Ricardian fiscal
policy). The upper bound of a positive optimal tax policy depends on the share of government
revenues financed through capital taxation, = ττK , i.e. φ = φ ( ), φ < 0.

16
Proof. In the following we adopt the convention that φ (τ K ) = φ + τ for convenience only. The
financial market equilibrium is unaffected by capital taxes (only indirectly through impact on savings and
consumption decision). The negative direct impact of taxes on growth increases with the equilibrium value
of φ:
∂g 1 ∂ 2g 1 ∂rK ∂uf
= − rK 1 − uf ≤ 0, =− 1 − uf − rK <0
∂τ K η ∂τ K ∂φ η ∂φ ∂φ

This has to be weighted against the positive effect of government bonds on the financial market equilib-
rium, which increases the growth rate:

γ (1 − τ K ) 1 − uf ρ + πuf
g = rK (φ) −
η η
∂g 1 − τK ∂r K ∂u f π ∂uf
= 1 − uf − rK −
∂φ η ∂φ ∂φ η ∂φ
∂2g 1 − τK ∂uf ∂rK ∂ 2 uf π ∂ 2 uf
= −2 − rK −
∂φ2 η ∂φ ∂φ ∂φ2 η ∂φ2
∂ 2 rK
given that ∂φ2
= 0. Under our functional assumption regarding the constant-elasticity-to-scale property of
∂2 g
the matching process, ∂φ2
will be negative except for very small values of φ < φ with φ > 0. Moreover, we
have that at φ = 0:
∂g ∂g
= 0, →∞
∂τ K ∂φ

∂g
Hence, a zero-tax policy cannot be optimal at φ = 0. Given that ∂τ K is monotonically increasing with
∂g
φ and ∂φis monotonically decreasing with φ, at least from φ > φ onwards. Hence there will be a φ > φ > 0
∂g
such that ∂φ + ∂τ∂gK = 0 for τ K > 0.

When only % of public spending is financed through corporate taxation, then the growth rate writes
as:
γ (1 − · τ) 1 − uf ρ + πuf
g= rK (φ) −
η η
and consequently, the direct negative effect of a tax-financed increase in public debt is reduced:

∂g 1 ∂2g 1
=− rK 1 − uf ≤ 0, = − rK 1 − uf ≤ 0
∂τ η ∂τ ∂ η
∂g ∂g
hence ∂φ + ∂τ ( ) = 0 is satisfied for a financial market equilibrium φ ( ) > φ > 0.

By introducing a competing asset that raises steady state interest rates, the government
can affect the equilibrium growth rate above the rate obtained in a no-government equi-
librium. This, however, is only the case for relatively low financial market tightness: the
higher it is, the less of an impact will the introduction of government bonds on interest rates
have. Unfortunately, there is no guarantee that the optimal tax policy will be positive at
the financial market equilibrium defined by (16), and no closed-form algebraic solution can
be derived. In order to get a sense of the equilibrium values, the following two graphs give
an idea on the parameter space (γ, κ) that would allow positive optimal tax policies, on
for a fully capital-taxed financed budget (right panel) and one for a budget financed at one
quarter by capital taxation, as is common in OECD countries.
17
 Figure 1: Allowable parameter space for positive optimal tax rates.

0.90 0.90

0.75 0.75

0.60 0.60
κ

κ
0.45 0.45

0.30 0.30

0.15 0.15

0.15 0.30 0.45 0.60 0.75 0.90 0.15 0.30 0.45 0.60 0.75 0.90
γ γ

(a) Full capital taxation financed public deficit ( =1) (b) Public deficit financed through capital taxation by 25% ( =0.25)

Note: The light grey shaded areas indicate the parameter tupels (κ, γ) for which the financial market
equilibrium is consistent with a positive optimal tax rate.

5.4 Interaction between monetary and fiscal policy

This section introduces coordination between monetary and fiscal policy in order to maximise
the growth rate. In this case, we have to introduce seignorage into the government’s budget
constraint to account for the impact of different levels of inflation (and money supply growth).
The wew government budget constraint including seignorage (s) now writes as:
Ḃ = rB B − T + G − s

Lemma 6 Raising the money supply growth rate increases the optimal rate of taxation
(τ ∗K , τ ∗w ).

Proof. The inflation rate does not affect the direct negative impact of corporate taxation on growth.
However, it has an impact on the way financial market liquidity affects growth. Recall that the growth rate
increases with financial market liquidity at rate:
∂g 1 − τK ∂rK ∂uf π ∂uf
= 1 − uf − rK −
∂φ η ∂φ ∂φ η ∂φ

This derivative depends positively on the inflation rate:

∂ 2g ∂ 2 g ∂φ 1 ∂uf
= · −
∂φ∂π ∂φ2 ∂π η ∂φ
∂uf
(1 − τ K ) 1 − uf uf ∂r
∂φ − ((1 − τ K ) rK − ρ) ∂φ
K

= 2 >0
(ρ − (1 − τ K ) (1 − uf ) rK + π · uf )
18
which is unambiguously positive for non-negative growth rates (for which rK (1 − τ K ) > rK (1 − τ K ) 1 − uf >
ρ holds).

Proposition 7 The growth rate can be maximised when government spending is financed
through a combination of seignorage and bonds. The optimal growth rate of money is in this
case lower than in the absence of government spending (and hence the inflation rate lower).

Proof. This follows directly from the lemma above.

6 Conclusion
The preceding paper has introduced financial and labour market search friction in an other-
wise standard competitive dynamic general equilibrium model. The paper has derived the
stationnary state in the absence of growth and the balanced growth paths of both exogenous
and endogenous growth. While the analysis has concentrated on the steady state behaviour,
the following appendix presents a calibration excercise for the discrete-time version of the
above model.
The comparative statics around the steady state has revealed interesting properties of
the model, in particular in the presence of (AK-)endogenous growth. In particular, the
paper demonstrates the existence of an growth-maximising inflation rate, a (possible) trade-
off between growth and employment maximisation, and the possibility for fiscal policies to
increase the growth rate in case of very liquid financial markets (from the point of view of
firms) by offering tax-backed public debt. Finally, positive interaction between monetary
and fiscal policy has been shown to exist due to their complementary effect on the financial
market equilibrium.
The paper constitutes a first draft of the importance of financial market frictions in
the search and matching variant for the proper assessment of monetary and fiscal policies.
In particular, the effects of the macroeconomic policy mix is shown to exist even in the
absence of price rigidities, as the model approach here focuses on the medium- to long-run.
Further developments along these lines are in preparation and aim at the comparison of
the effects described here with different enodgenous growth mechanisms (most notably the
Schumpeterian one) and the development of a short-run model (with stick prices) that can be
used to estimate and evaluate the effects of monetary and fiscal policies in OECD countries.

7 References
1. Amable, Bruno and Ekkehard Ernst (2005), ”Financial and labor market interactions.
Specific investments and market liquidity”, CEM Working Paper, no. 93, University
of Bielefeld
19
 2. Becsi, Zsolt, Victor Li and Ping Wang (2000), ”Financial matchmakers in credit
markets with heterogeneous borrowers ”, Federal Reserve Bank of Atlanta Working
Paper no. 2000-14.

3. Christiano, Larwrence (1991), ”Modelling the liquidity effect of a money shock”,

Federal Reserve Bank of Minneapolis Quarterly Review, no. 15, pp. 3-34

4. Christiano, Larwrence, Martin Eichenbaum, Charles L. Evans (1996), ”Sticky Price

and Limited Participation Models of Money: A Comparison”, Federal Reserve Bank of
Minneapolis, Research Department Staff Report, no. 227

5. Den Haan, W., G. Ramey and J. Watson (1999), ”Liquidity Flows and Fragility of
Business Entreprises”, NBER Working Paper, No. 7057.

6. Eriksson, Clas (1997), ”Is there a trade-off between employment and growth? ”, Oxford
Economic Papers, 49, pp. 77-88

7. Ernst, Ekkehard (2005), ”What can we expect from structural reforms? The impor-
tance of market interactions and specific investments for the impact of policy changes
on economic performance”, CEM Working Paper, no. 94, University of Bielefeld

8. Fuerst, T.S. (1992), ”Liquidity, loanable funds, and real activity ”, Journal of Mone-
tary Economics, vol. 29/1, pp. 3-24

9. Lucas, Robert E. (1990), ”Liquidity and interest rates”, Journal of Economic Theory,
vol. 4/2, pp. 103-124

10. Pissarides, Christopher (2000), Equilibrium Unemployment Theory, Cambridge, Mass:

MIT Press.

11. Walsh, Carl E. (2001), Monetary Theory and Policy, MIT-Press

12. Wang, Ping and Danyang Xie (2003), ”Real Effects of Steady Inflation in the Presence
of Labor-Market Search Frictions: Might Mundell-Tobin be Right?”, IMF mimeo

13. Wasmer, Etienne and Philippe Weil (2000), The Macroeconomics of Labor and Credit
Market Imperfections, IZA Discussion Paper, no. 179

8 Appendix: The discrete-time version

Even in the absence of steady state growth, the friction-ladden matching process on financial
markets may produce persistent effects of shocks. Hence, in order to analyse the impact of a
technology and a monetary policy shock on the reactions around the steady state, the model
has been linearized around {φ∗ , r∗ , θ∗ , k ∗ , N ∗ , s∗ , w∗ , c∗ } assuming no growth, i.e. g = 0. In

20
the following, different impulse responses are presented, depending on the degree of financial
market frictions, supposed to be represented by p0 .
The following parameter have been used to calibrate the discrete-time version of the
model. We set the standard values α = 0.36, β = 0.97, δ = 0.02. For the matching process,
some effort had already been undertaken by Ernst (2005) to select plausible values based
on the discussion in the literature; in particular, the labour market matching function had
been calibrated using q0 = 0.6 and q1 = 0.5. For the financial market, p1 = 0.4 has been
used together with p0 ranging from 0.3 to 0.9 to reflect different degress of financial market
flexibility. The replacement rate has been selected according to figures for the US at around
10%. The destruction rate of jobs has been fixed at σ = 0.1, a value close to what is regularly
used in the literature. The bargaining parameters, the costs of setting up a vacancy for a job
and the cost of issuing new debt has been selected such as to get reasonable unemployment
figures; they have been fixed at κ = 0.06, γ = 0.1, ρ = 0.5, ζ = 0.05. Finally, the persistence
of the technology shock has been fixed at 0.95.

21
 Output Consumption
4.0E-02 3.5E-02

3.5E-02 3.0E-02
3.0E-02 2.5E-02
2.5E-02
2.0E-02
2.0E-02
1.5E-02
1.5E-02
1.0E-02
1.0E-02

5.0E-03 5.0E-03

0.0E+00 0.0E+00
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Quarters Quarters

p0=0.3 p0=0.6 p0=0.9 p0=0.3 p0=0.6 p0=0.9

Capital Employment
6.0E-01 0.E+00
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
5.0E-01 -1.E-07

4.0E-01 -2.E-07

3.0E-01 -3.E-07

2.0E-01 -4.E-07

1.0E-01 -5.E-07

0.0E+00 -6.E-07
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-1.0E-01 -7.E-07
Quarters Quarters

p0=0.3 p0=0.6 p0=0.9 p0=0.3 p0=0.6 p0=0.9

Vacancies Free financial funds

2.E-04 1.0E-02

0.E+00 5.0E-03
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 0.0E+00
-2.E-04
-5.0E-03 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-4.E-04 -1.0E-02
-6.E-04 -1.5E-02

-8.E-04 -2.0E-02
-2.5E-02
-1.E-03
-3.0E-02
-1.E-03 -3.5E-02
-1.E-03 -4.0E-02
Quarters Quarters

p0=0.3 p0=0.6 p0=0.9 p0=0.3 p0=0.6 p0=0.9

Figure 2: Output, capital stock and employment reactions to a technology shock

22
 Output Consumption
0.E+00 0.0E+00
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-2.0E-04
-1.E-04
-4.0E-04

-2.E-04 -6.0E-04

-8.0E-04
-3.E-04

-1.0E-03
-4.E-04
-1.2E-03

-5.E-04 -1.4E-03
Quarters Quarters

p0=0.3 p0=0.6 p0=0.9 p0=0.3 p0=0.6 p0=0.9

Capital Employment
0.0E+00 0.E+00
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-2.0E-03 -1.E-08

-4.0E-03
-2.E-08
-6.0E-03
-3.E-08
-8.0E-03
-4.E-08
-1.0E-02

-1.2E-02 -5.E-08

-1.4E-02 -6.E-08
Quarters Quarters

p0=0.3 p0=0.6 p0=0.9 p0=0.3 p0=0.6 p0=0.9

Vacancies Free financial funds

0.E+00 3.E-04
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-1.E-05
2.E-04
-2.E-05

-3.E-05 1.E-04

-4.E-05
0.E+00
-5.E-05 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-6.E-05 -1.E-04

-7.E-05
-2.E-04
-8.E-05

-9.E-05 -3.E-04

Quarters Quarters

p0=0.3 p0=0.6 p0=0.9 p0=0.3 p0=0.6 p0=0.9

Figure 3: Output, capital stock and employment reactions to a monetary policy shock

23