Emerging Market Business Cycles: The Role of Labor Market Frictions

Emine Boz · Ceyhun Bora Durdu

77 citations0/0 files storedJournal of money credit and banking

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

Abstract

Emerging economies are characterized by higher variability of consumption and real wages relative to output and a strongly countercyclical current account. A small open economy model with search‐matching frictions and countercyclical interest rate shocks can account for these regularities. Search‐matching frictions affect permanent income, and increase future employment uncertainty, heightening workers' incentives to save and generating a greater response of consumption and the current account. The greater consumption response feeds into larger fluctuations in workers' willingness to work, while interest rate shocks lead to variations in firms' willingness to hire; both of these outcomes contribute to highly variable wages.

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References

1999Why do Some Countries Produce So Much More Output Per Worker than Others?1994Job Creation and Job Destruction in the Theory of Unemployment 1991Equilibrium Unemployment Theory 2005The Cyclical Behavior of Equilibrium Unemployment and Vacancies 2002Closing Small Open Economy Models n.d.Looking into the Black Box: A Survey of the Matching Function 1986Investment, Capacity Utilization and the Real Business Cycle 1985Indivisible labor and the business cycle

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