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Macroprudential Policy and Labor Market Dynamics in Latin America

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  • Finkelstein-Shapiro, Alan
  • González Gómez, Andrés

Abstract

This paper builds a small open economy business cycle model with labor and financial market frictions that incorporates frictional, endogenous self-employment entry and a link between formal credit markets, informal credit, and the labor market. The paper then shows that the model is consistent with the cyclical behavior of both labor and credit markets in Latin American economies and analyzes the aggregate consequences of cyclical macroprudential policy for labor market and aggregate dynamics. It is found that a policy that reduces credit fluctuations successfully reduces consumption, investment, and output volatility, but generates substantially higher unemployment fluctuations in response to productivity shocks. Moreover, the policy increases the volatility of all these variables in response to net worth shocks. The link between formal credit markets, input credit between firms, and self-employment plays a key role in explaining the adverse impact of macroprudential policy on unemployment dynamics. The findings point to potential gains from policy complementarities between macroprudential regulation and active labor market interventions over the business cycle.

Suggested Citation

  • Finkelstein-Shapiro, Alan & González Gómez, Andrés, 2015. "Macroprudential Policy and Labor Market Dynamics in Latin America," IDB Publications (Working Papers) 6866, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:6866
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    File URL: https://publications.iadb.org/publications/english/document/Macroprudential-Policy-and-Labor-Market-Dynamics-in-Latin-America.pdf
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    Cited by:

    1. David Fielding & Fred Gibson, 2013. "Aid and Dutch Disease in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 22(1), pages 1-21, January.

    More about this item

    Keywords

    Labor search; Financial frictions; Business cycles; Macroprudential policies;

    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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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