## Macroprudential Policy and Labor Market Dynamics in Emerging Economies

_IMF Working Papers, April 3, 2015_

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## Bibliographic details
- Authors: Alan Finkelstein Shapiro, Andres Gonzalez
- Published: April 3, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475563641.001

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### Overview and research question
- Authors: Alan Finkelstein Shapiro, Andres Gonzalez
- Publication date: April 3, 2015
- Publication type: IMF Working Paper (Working Paper No. 2015/078, Issue: 078, Volume: 2015)
- Pages: 48
- DOI: https://doi.org/10.5089/9781475563641.001
- Stock No: WPIEA2015078
- ISBN: 9781475563641
- ISSN: 1018-5941
- Core question: How do formal credit markets, informal input credit, and the structure of the labor market interact in emerging economies, and what are the macroeconomic and labor-market effects of countercyclical macroprudential policy?

### Model and methodology
- Model type:
  - Small open economy real business cycle model with labor and financial market frictions.
- Key model ingredients:
  - Formal credit markets.
  - Informal financing (input credit) used by owner-only self-employed firms.
  - Labor market structure distinguishing self-employment (owner-only firms) and salaried firms.
  - Interaction among formal credit, informal credit, and labor market frictions.
- Empirical fit:
  - The model successfully replicates the cyclical behavior of sectoral employment, formal credit, and the main macroeconomic aggregates in emerging economies.

### Main findings
- Role of self-employment and input credit:
  - Emerging economies have high shares of self-employed individuals running owner-only firms with limited access to formal financing and reliance on informal input credit from other firms.
  - The link between input credit and the labor market structure is key for capturing cyclical dynamics of labor and credit markets in the data.
- Effects of countercyclical macroprudential policy:
  - A countercyclical macroprudential policy that reduces formal credit fluctuations has positive though quantitatively limited effects on consumption and output volatility.
  - The same countercyclical policy generates larger unemployment fluctuations in response to productivity shocks.
  - The countercyclical policy increases labor market and aggregate volatility in response to net worth shocks.

### Policy implications and interpretation
- Trade-offs of countercyclical macroprudential tools:
  - Reducing formal credit volatility can modestly stabilize consumption and output but may exacerbate unemployment volatility under productivity shocks.
  - Countercyclical tightening can increase both labor market and aggregate volatility when shocks originate from net worth.
- Importance for emerging economies:
  - Policy design should account for high prevalence of owner-only self-employment and reliance on informal input credit, as these features materially alter transmission of macroprudential measures to labor market outcomes.

*IMF Working Paper: "Macroprudential Policy and Labor Market Dynamics in Emerging Economies" by Alan Finkelstein Shapiro and Andres Gonzalez (April 3, 2015), Working Paper No. 2015/078, Pages: 48, DOI: https://doi.org/10.5089/9781475563641.001*

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