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Employment Protection and Business Cycles in Emerging Economies

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  • Lama, Ruy

    (International Monetary Fund)

  • Urrutia, Carlos

    (Centro de Investigación Económica, ITAM)

Abstract

We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment.

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Bibliographic Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2012-003.

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Date of creation: Jan 2012
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Handle: RePEc:rbp:wpaper:2012-003

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  1. Marcelo Veracierto, 2007. "Establishments dynamics and matching frictions in classical competitive equilibrium," Working Paper Series WP-07-16, Federal Reserve Bank of Chicago.
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Cited by:
  1. Sangeeta Pratap & Carlos Urrutia, 2012. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 336-358, July.
  2. Andres Fernandez & Felipe Meza, 2011. "Labor, Output and Consumption in Business Cycle Models of Emerging Economies: A Comment," Working Papers 1106, Centro de Investigacion Economica, ITAM.
  3. Craighead, William D., 2014. "Monetary rules and sectoral unemployment in open economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 277-292.

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