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Financial Development, Unemployment Volatility, and Sectoral Dynamics

Brendan Epstein () and Alan Finkelstein Shapiro ()

MPRA Paper from University Library of Munich, Germany

Abstract: We document a negative and significant relationship between domestic financial de- velopment and unemployment volatility in developing and emerging economies (DEMEs). However, there is no significant relationship between these variables in advanced economies (AEs). A labor-search model with production heterogeneity, sectoral financial frictions, and interfirm input credit can rationalize these differential cross-country results. Un- employment volatility is decreasing in financial development, but the quantitative relevance of this relationship is increasing in the extent to which input credit is prevalent in an economy. This insight is consistent with the fact that, empirically, input credit is much more prominent in DEMEs compared to AEs.

Keywords: Business cycles; financial development; financial frictions; labor markets; large firms; search frictions; small firms (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 F41 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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