Equilibrium Unemployment During Financial Crises

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent. Terms of use: Documents inThe unauthorized commercial use of Bank documents is prohibited and may be punishable under the Bank's policies and/or applicable laws.Copyright © Inter-American Development Bank. This working paper may be reproduced for any non-commercial purpose. It may also be reproduced in any academic journal indexed by the American Economic Association's EconLit, with previous consent by the Inter-American Development Bank (IDB), provided that the IDB is credited and that the author(s) receive no income from the publication. Financial crises in both emerging and developed economies have been characterized by large output drops and spikes in unemployment and interest rates. To account for these stylized facts this paper builds a business cycle model where financial and labor market frictions interact as occasionally binding borrowing constraints and search frictions. The model is calibrated to a Sudden Stop-prone emerging economy and also to some peripheral European economies in the recent crisis. The model accounts for unemployment dynamics both during crises and at regular business cycle frequencies. The paper also assesses the welfare implications of policies that reduce real minimum wages during crises. Luis Felipe Saenz provided valuable research assistance. We also thank Nan Li for sharing the data on real wages. Any remaining errors remain our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank. Cataloging-in-Publication

Macroprudential Policy and Labor Market Dynamics in Emerging Economies

“…More notably, comparing the benchmark model with a model with endogenous selfemployment but no capital search frictions (i.e., no input credit channel) (column 5 of Table 6) shows that the latter model fails to deliver countercyclical self-employment, leverage, and interest rates, a relative volatility of consumption greater than one, a countercyclical current account-output ratio, and the persistence of unemployment in the data. 24 This gives additional validity to the search frictions and the inclusion of input credit in the benchmark model.…”