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Labor force participation, interest rate shocks, and unemployment dynamics in emerging economies

Alan Finkelstein Shapiro ()

Journal of Development Economics, 2018, vol. 133, issue C, 346-374

Abstract: Emerging economies (EMEs) have highly volatile unemployment and real wages. Standard models with interest rate shocks can generate higher unemployment volatility, but still fall quantitatively short of matching the empirical volatility of unemployment. A small open economy search model with endogenous participation and self-employment—a feature of EMEs—generates 90 percent of the volatility of unemployment in the data, highly volatile wages, and quantitatively-consistent cyclical aggregate dynamics amid productivity and interest rate shocks of plausible magnitudes. Endogenous participation amplifies shocks and plays a critical role in overcoming a key limitation of standard search models for EMEs.

Keywords: Emerging economies; Business cycles; Unemployment volatility; Search frictions; Labor force participation (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 F41 J6 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jdeveco.2018.03.003

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Handle: RePEc:eee:deveco:v:133:y:2018:i:c:p:346-374