Emerging Market Business Cycles: The Role of Labor Market Frictions

52 Pages Posted: 7 Nov 2012

See all articles by Emine Boz

Emine Boz

International Monetary Fund (IMF)

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System

Nan, Li

Ohio State University (OSU)

Date Written: October 2012

Abstract

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.

Keywords: Business cycles, Emerging markets, Labor markets, Productivity, Economic models, emerging markets, labor markets, business cycles, search frictions, unemployment, employment, unemployment rate, bargaining, unemployed, number of employees, employment data, unemployment insurance, future employment, total employment, unemployed worker, unemployed workers, unemployment rates, public sector employment, job creation, unemployment increases, unemployment spell, employment status, employment statistics, unemployment statistics, formal employment, employment relationship, equilibrium unemployment, employment share, high unemployment rate, unemployment risk, future employment prospects, beveridge cur

JEL Classification: E24, E44, F41, F43

Suggested Citation

Boz, Emine and Durdu, Ceyhun Bora and Li, Nan,, Emerging Market Business Cycles: The Role of Labor Market Frictions (October 2012). IMF Working Paper No. 12/237. Available at SSRN: https://ssrn.com/abstract=2172189

Emine Boz (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Nan, Li

Ohio State University (OSU) ( email )

Blankenship Hall-2010
901 Woody Hayes Drive
Columbus, OH OH 43210
United States

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