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Increasing Domestic Financial Participation: Implications for Business Cycles and Labor Markets

Author

Listed:
  • Brendan Epstein

    (University of Massachusetts, Lowell)

  • Alan Finkelstein Shapiro

    (Tufts University)

Abstract

Recent policies in emerging economies (EMEs) have sought to increase the shares of households and firms that participate in the domestic banking system amid the backdrop that, compared to advanced economies (AEs), EMEs have drastically lower shares of both firm and household financial participation. We build a model with extensive margins of firm and household financial participation and equilibrium unemployment to study the impact on EME labor-market and business cycle dynamics of increasing the shares of firm and household financial participation in EMEs to AE levels. We find that a joint increase in household and firm domestic financial participation considerably narrow the differences in some, but not all, business cycle moments between EMEs and AEs. Critically, the impact of increasing only firm or only household participation can differ substantially from the impact of a joint increase. We stress the relevance of the extensive margin of domestic financial participation for labor-market and business cycle dynamics and the fact that promoting a joint increase in the shares of household and firm financial participation in EMEs can lead to smoother cyclical fluctuations, particularly in labor markets. (Copyright: Elsevier)

Suggested Citation

  • Brendan Epstein & Alan Finkelstein Shapiro, 2021. "Increasing Domestic Financial Participation: Implications for Business Cycles and Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 128-145, January.
    • Handle: RePEc:red:issued:19-234
    DOI: 10.1016/j.red.2020.06.015
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    Cited by:

    1. Finkelstein-Shapiro, Alan & Mandelman, Federico S. & Nuguer, Victoria, 2022. "Fintech Entry, Firm Financial Inclusion, and Macroeconomic Dynamics in Emerging Economies," IDB Publications (Working Papers) 11895, Inter-American Development Bank.
    2. Campos, Nauro F. & De Grauwe, Paul & Ji, Yuemei, 2023. "Structural reforms and economic performance: the experience of advanced economies," LSE Research Online Documents on Economics 120870, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Emerging economies; Endogenous firm entry; Business cycles; Working capital; Unemployment; Domestic financial participation;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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