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Banking and Financial Participation Reforms, Labor Markets, and Financial Shocks

Brendan Epstein () and Alan Finkelstein Shapiro ()

MPRA Paper from University Library of Munich, Germany

Abstract: The degree of bank competition as well as firms’ and households’ participation in the domestic banking system differ considerably in emerging economies (EMEs) relative to advanced economies (AEs). We build a small-open-economy model with endogenous firm entry, monopolistic banks, household and firm heterogeneity in par- ticipation in the banking system, and labor search to analyze the labor market and aggregate consequences of financial participation and banking reforms in EMEs. We find that there is a pre-reform threshold of firm participation in the banking system below which reform implementation leads to sharper unemployment and aggregate fluctuations amid foreign interest rate and aggregate productivity shocks. Our find- ings suggest that comprehensive banking reforms that foster household participation and bank competition in tandem can reduce labor market and aggregate volatility, but only under a high-enough pre-reform level of firm participation in the banking system and a non-negligible increase in bank competition.

Keywords: Emerging economies; structural reforms; foreign interest rate shocks; business cycles; banking sector; unemployment; financial participation. (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 F41 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg and nep-mac
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:88697

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