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Emerging Market Business Cycles: The Role of Labor Market Frictions

  • Bora Durdu

    (Federal Reserve Board)

  • Emine Boz

    (IMF)

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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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1092.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1092
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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