“Frictions in Financial and Labor Markets”: A Summary of the 35th Annual Economic Policy Conference

a borrowing limit—and find that when the model must match the observed distribution of the growth rate of the output of individual firms, the contribution of market imperfections to TFP is rather small. In “Middlemen in Limit-Order Markets,” Jovanovic and Menkveld analyze the role of middlemen in asset markets who are assumed to have superior information and, hence, potentially improve the allocation of resources as they can “direct” each asset to its best use. They find that, depending on the distribution of information of potential asset traders, the presence of middlemen can either increase or decrease efficiency. They also confront the model with data that are consistent with the introduction of middlemen but their results are ambiguous. The last paper that most directly discusses the role of financial frictions is “Financial Markets and Unemploy ment,” by Monacelli, Quadrini, and Trigari. They study a situation in which firms and workers bargain for wages but the total surplus—the object to be divided—decreases in relation to the amount of debt carried by the firm. They show that, in T he Thirty-Fifth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis was held October 21-22, 2010. The papers presented at the conference covered a variety of approaches and topics within the general theme of frictions in financial and labor markets. One group of papers directly addresses the question of the impact of frictions in financial markets—defined as a departure from the complete market, perfectly competitive Arrow-Debreu equilibrium—on economic performance. In “Quantifying the Impact of Financial Development on Economic Develop ment,” Greenwood, Sanchez, and Wang study the impact of increases in the relative (to the rest of the economy) efficiency of financial intermediaries in output and total factor productivity (TFP). For a calibrated version of their model they conclude that financial frictions can account for large changes in output and measured TFP. A somewhat different conclusion is reached by Midrigan and Xu in “Finance and Misallocation: Evidence from Plant-Level Data.” In that paper, the authors study a different financial friction—