Emerging Market Business Cycles : The Role of Labor Market Frictions

Author/Editor:

Emine Boz ; Ceyhun Bora Durdu ; Nan Li

Publication Date:

October 2, 2012

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 are characterized by higher consumption and real wage variability relative to output and a strongly countercyclical current account. A real business cycle model of a small open economy that embeds a Mortensen-Pissarides type of search-matching frictions and countercyclical interest rate shocks can jointly account for these regularities. In the face of countercyclical interest rate shocks, search-matching frictions increase future employment uncertainty, improving workers’ incentive to save and generating a greater response of consumption and the current account. Higher consumption response in turn feeds into larger fluctuations in the workers’ bargaining power while the interest rates shocks lead to variations in the firms’ willingness to hire; both of which contribute to a highly variable real wage.

Series:

Working Paper No. 12/237

Subject:

English

Publication Date:

October 2, 2012

ISBN/ISSN:

9781475511208/1018-5941

Stock No:

WPIEA2012237

Format:

Paper

Pages:

51

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