Jobless Recoveries During Financial Crises: Is Inflation the Way Out?

46 Pages Posted: 28 Nov 2013 Last revised: 14 Apr 2021

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Pablo Ottonello

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2013

Abstract

This paper discusses three policy tools to mitigate jobless recoveries during financial crises: inflation, real currency depreciation, and credit-recovery policies. Using a sample of financial crises in Emerging Market economies, we document that large inflationary spikes appear to help unemployment to get back to pre-crisis levels. However, the counterpart of inflation is sizably lower real wages. Hence, inflation does not prevent wage earners as a whole from getting hit by financial crises. Interestingly, neither the change in the real exchange rate nor the change in output composition (tradables/nontradables), from output peak to recovery point, displays a statistically significant relationship with inflation or jobless recovery. This suggests that currency depreciation can help reduce unemployment only insofar as it is associated with inflation, and that jobless recovery is likely due to nominal wage rigidity. The paper also shows that measures to reactivate credit flows could be beneficial to wage earners as a whole, as measured by the real wage bill.

Suggested Citation

Calvo, Guillermo A. and Coricelli, Fabrizio and Ottonello, Pablo, Jobless Recoveries During Financial Crises: Is Inflation the Way Out? (November 2013). NBER Working Paper No. w19683, Available at SSRN: https://ssrn.com/abstract=2360951

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ( email )

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Paris School of Economics (PSE)

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Centre for Economic Policy Research (CEPR)

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Pablo Ottonello

University of Michigan at Ann Arbor - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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