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Emerging Market Business Cycles: The Role of Labor Market Frictions
Author(s) -
BOZ EMINE,
DURDU C. BORA,
LI NAN
Publication year - 2015
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12168
Subject(s) - economics , consumption (sociology) , matching (statistics) , incentive , small open economy , business cycle , work (physics) , interest rate , variable (mathematics) , labour economics , current account , monetary economics , microeconomics , macroeconomics , monetary policy , exchange rate , mechanical engineering , mathematical analysis , social science , statistics , mathematics , sociology , engineering
Emerging economies are characterized by higher variability of consumption and real wages relative to output and a strongly countercyclical current account. A small open economy model with search‐matching frictions and countercyclical interest rate shocks can account for these regularities. Search‐matching frictions affect permanent income, and increase future employment uncertainty, heightening workers' incentives to save and generating a greater response of consumption and the current account. The greater consumption response feeds into larger fluctuations in workers' willingness to work, while interest rate shocks lead to variations in firms' willingness to hire; both of these outcomes contribute to highly variable wages.