Macroprudential Policy and Labor Market Dynamics in Emerging Economies

Alan Finkelstein Shapiro and Andres Gonzalez

No 2015/078, IMF Working Papers from International Monetary Fund

Abstract: Emerging economies have high shares of self-employed individuals running owner-only firms who, in contrast to many salaried firms, have little access to formal financing and therefore rely on informal financing (input credit) from other firms. We build a small open economy real business cycle model with labor and financial market frictions where formal credit markets, informal credit, and the structure of the labor market interact. The model successfully replicates the cyclical behavior of sectoral employment, formal credit, and the main macroeconomic aggregates in emerging economies. We show that a countercyclical macroprudential policy that reduces formal credit fluctuations has positive though quantitatively limited effects on consumption and output volatility, but generates larger unemployment fluctuations in response to productivity shocks; the same policy increases labor market and aggregate volatility in response to net worth shocks. The link between input credit and the labor market structure---key for capturing the cyclical dynamics of labor and credit markets in the data---plays a crucial role for these results.

Keywords: WP; labor market; total output; business cycle; Business cycles; self-employment; labor search frictions; financial frictions; macroprudential policy; salaried firm; capital producer; self-employment sector; search cost; credit market; rate equation; supply condition; rental rate; capital relationship; purchased capital; matching firm; rental rate equation; Labor markets; Employment; Unemployment; Global (search for similar items in EconPapers)
Pages: 48
Date: 2015-04-03
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Citations: View citations in EconPapers (4)

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