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Emerging Market Business Cycles: The Role of Labor Market Frictions

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  • EMINE BOZ
  • C. BORA DURDU
  • NAN LI

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.

Suggested Citation

  • Emine Boz & C. Bora Durdu & Nan Li, 2015. "Emerging Market Business Cycles: The Role of Labor Market Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 31-72, February.
  • Handle: RePEc:wly:jmoncb:v:47:y:2015:i:1:p:31-72
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    File URL: http://hdl.handle.net/10.1111/jmcb.12168
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    Cited by:

    1. Bi, Huixin & Shen, Wenyi & Yang, Shu-Chun S., 2016. "Fiscal limits in developing countries: A DSGE Approach," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 119-130.
    2. repec:eee:deveco:v:127:y:2017:i:c:p:25-41 is not listed on IDEAS
    3. repec:eee:inecon:v:108:y:2017:i:c:p:67-81 is not listed on IDEAS
    4. Bauducco, Sofia & Caprioli, Francesco, 2014. "Optimal fiscal policy in a small open economy with limited commitment," Journal of International Economics, Elsevier, vol. 93(2), pages 302-315.
    5. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
    6. Duncan, Roberto, 2015. "Simple models to understand and teach business cycle macroeconomics for emerging market and developing economies," Globalization and Monetary Policy Institute Working Paper 252, Federal Reserve Bank of Dallas.
    7. Finkelstein Shapiro, Alan & Mandelman, Federico S., 2016. "Remittances, entrepreneurship, and employment dynamics over the business cycle," Journal of International Economics, Elsevier, vol. 103(C), pages 184-199.
    8. repec:eee:jimfin:v:83:y:2018:i:c:p:23-43 is not listed on IDEAS
    9. Serdar Kabaca, 2011. "Labor Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing," Koç University-TUSIAD Economic Research Forum Working Papers 1122, Koc University-TUSIAD Economic Research Forum.
    10. repec:eee:jimfin:v:78:y:2017:i:c:p:44-63 is not listed on IDEAS
    11. Markus Kirchner & Rodrigo Tranamil, 2016. "Calvo Wages Vs. Search Frictions: a Horse Race in a DSGE Model of a Small Open Economy," Working Papers Central Bank of Chile 778, Central Bank of Chile.
    12. repec:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9440-5 is not listed on IDEAS
    13. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Employment and firm heterogeneity, capital allocation, and countercyclical labor market policies," Journal of Development Economics, Elsevier, vol. 127(C), pages 25-41.
    14. Martin Guzman & Joseph E. Stiglitz, 2016. "Pseudo-wealth and Consumption Fluctuations," NBER Working Papers 22838, National Bureau of Economic Research, Inc.
    15. repec:eee:inecon:v:112:y:2018:i:c:p:123-133 is not listed on IDEAS

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