Emerging Market Business Cycles: The Role of Labor Market Frictions

Emine Boz, C. Bora Durdu and Nan Li

No 2012/237, IMF Working Papers from International Monetary Fund

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: WP; labor market; unemployment rate; interest rate shock; emerging markets; labor markets; business cycles; search frictions; TFP shock; current account; job market; Wages; Consumption; Unemployment; Total factor productivity; Global (search for similar items in EconPapers)
Pages: 51
Date: 2012-10-02
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Emerging Market Business Cycles: The Role of Labor Market Frictions (2015)
Working Paper: Emerging Market Business Cycles: The Role of Labor Market Frictions (2011)
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