Equilibrium Unemployment during Financial Crises

Andrés Fernández Martin and Juan Herreño

No IDB-WP-390, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: Financial crises in both emerging and developed economies have been characterized by large output drops and spikes in unemployment and interest rates. To account for these stylized facts this paper builds a business cycle model where financial and labor market frictions interact as occasionally binding borrowing constraints and search frictions. The model is calibrated to a Sudden Stop-prone emerging economy and also to some peripheral European economies in the recent crisis. The model accounts for unemployment dynamics both during crises and at regular business cycle frequencies. The paper also assesses the welfare implications of policies that reduce real minimum wages during crises.

JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (2)

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Working Paper: Equilibrium Unemployment During Financial Crises (2013)
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