Macroprudential Policy and Labor Market Dynamics in Emerging Economies

Author/Editor:

Alan Finkelstein Shapiro ; Andres Gonzalez

Publication Date:

April 3, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Emerging economies have high shares of self-employed individuals running owner-only firms who, in contrast to many salaried firms, have little access to formal financing and therefore rely on informal financing (input credit) from other firms. We build a small open economy real business cycle model with labor and financial market frictions where formal credit markets, informal credit, and the structure of the labor market interact. The model successfully replicates the cyclical behavior of sectoral employment, formal credit, and the main macroeconomic aggregates in emerging economies. We show that a countercyclical macroprudential policy that reduces formal credit fluctuations has positive though quantitatively limited effects on consumption and output volatility, but generates larger unemployment fluctuations in response to productivity shocks; the same policy increases labor market and aggregate volatility in response to net worth shocks. The link between input credit and the labor market structure---key for capturing the cyclical dynamics of labor and credit markets in the data---plays a crucial role for these results.

Series:

Working Paper No. 15/78

Subject:

English

Publication Date:

April 3, 2015

ISBN/ISSN:

9781475563641/1018-5941

Stock No:

WPIEA2015078

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

48

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