Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America

Pontificia Universidad Catolica de Chile Documento de Trabajo No. 375

39 Pages Posted: 18 Dec 2010

See all articles by Francisco A. Gallego

Francisco A. Gallego

Pontificia Universidad Catolica de Chile

José Tessada

Business School, Pontificia Universidad Católica

Date Written: August 1, 2010

Abstract

Sudden stops and international financial crises have been a main feature of developing countries in the last three decades. While their aggregate effects are well known, the disaggregated channels through which they work are not well explored yet. In this paper, we study the sectoral responses that take place over episodes of sudden stops. Using job flows from a sectoral panel dataset for four Latin American countries, we find that sudden stops are characterized as periods of lower job creation and increased job destruction. Moreover, these effects are heterogeneous across sectors: we find that when a sudden stop occurs, sectors with higher dependence on external financing experience lower job creation. In turn, sectors with higher liquidity needs experience significantly larger job destruction. This evidence is consistent with the idea that dependence on external financing affects mainly the creation margin and that exposure to liquidity conditions affects mainly the destruction margin. Overall, our results confirm the large labor market effects of sudden stops, and provide evidence of financial conditions being an important transmission channel of sudden stops within a country, highlighting the role of financial frictions in the restructuring process in general.

Keywords: sudden stops, gross job flows, adjustment, financial frictions

JEL Classification: E24, F3, G21, J63

Suggested Citation

Gallego, Francisco A. and Tessada, Jose, Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America (August 1, 2010). Pontificia Universidad Catolica de Chile Documento de Trabajo No. 375. Available at SSRN: https://ssrn.com/abstract=1718691 or http://dx.doi.org/10.2139/ssrn.1718691

Francisco A. Gallego (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Casilla 76
Correo 17
Santiago
Chile

HOME PAGE: http://www.economia.puc.cl/fgallego

Jose Tessada

Business School, Pontificia Universidad Católica ( email )

Vicuna Mackenna 4860
Santiago
Chile

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