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Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America

Francisco Gallego and José Tessada

No 10, Working Papers ClioLab from EH Clio Lab. Instituto de Economía. Pontificia Universidad Católica de Chile

Abstract: Sudden stops and international financial crises have been a main feature of developing countries in the last three decades. While their aggregate effects are well known, the disaggregated channels through which they work are not well explored yet. In this paper, we study the sectoral responses that take place over episodes of sudden stops. Using job flows from a sectoral panel dataset for four Latin American countries, we find that sudden stops are characterized as periods of lower job creation and increased job destruction. Moreover, these effects are heterogeneous across sectors: we find that when a sudden stop occurs, sectors with higher dependence on external financing experience lower job creation. In turn, sectors with higher liquidity needs experience significantly larger job destruction. This evidence is consistent with the idea that dependence on external financing affects mainly the creation margin and that exposure to liquidity conditions affects mainly the destruction margin. Overall, our results confirm the large labor market effects of sudden stops, and provide evidence of financial conditions being an important transmission channel of sudden stops within a country, highlighting the role of financial frictions in the restructuring process in general.

Date: 2010
New Economics Papers: this item is included in nep-dev, nep-lab and nep-lam
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http://cliolab.economia.uc.cl/docs/wp/wp_10.pdf (application/pdf)

Related works:
Journal Article: Sudden stops, financial frictions, and labor market flows: Evidence from Latin America (2012) Downloads
Working Paper: Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America (2010) Downloads
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