Emerging Market Business Cycles: The Role of Labor Market Frictions
IMF Working Papers, October 2, 2012
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Bibliographic details
- Authors: Emine Boz, Ceyhun Bora Durdu, Nan Li
- Published: October 2, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475511208.001
Key findings
- 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 feeds into larger fluctuations in the workers’ bargaining power.
- Interest rate shocks lead to variations in the firms’ willingness to hire.
- The combination of bargaining-power fluctuations and hiring willingness contributes to a highly variable real wage.
Model and mechanisms
- Core model components:
- Mortensen-Pissarides type search-matching frictions in the labor market.
- Countercyclical interest rate shocks affecting a small open economy.
- Mechanism summary:
- Countercyclical interest rate shocks → increased employment uncertainty due to search-matching frictions → higher precautionary saving by workers → amplified consumption and current account responses.
- Amplified consumption responses ↔ larger swings in workers’ bargaining power.
- Interest rate shocks ↔ variations in firms’ hiring incentives.
- Combined effects produce pronounced real wage variability.
Implications for emerging markets
- Labor market frictions are central to understanding:
- Elevated consumption volatility relative to output.
- Strong countercyclical behavior of the current account.
- Large real wage fluctuations.
- Policy-relevant points implied by the analysis:
- Policies that affect employment uncertainty or the functioning of search-matching in labor markets can materially influence consumption dynamics and external balances.
- Interest rate dynamics that are countercyclical have amplified real-side effects through labor market channels.
Publication and metadata
- Authors: Emine Boz, Ceyhun Bora Durdu, Nan Li
- Date: October 2, 2012
- Series: Working Paper No. 2012/237
- Issue: 237
- Volume: 2012
- Pages: 51
- DOI: https://doi.org/10.5089/9781475511208.001
- Stock No: WPIEA2012237
- ISBN: 9781475511208
- ISSN: 1018-5941
- Subjects: Consumption, Labor, Labor markets, National accounts, Production, Total factor productivity, Unemployment, Wages
- Keywords: business cycles, Consumption, current account, emerging markets, Global, interest rate shock, job market, labor market, labor markets, search frictions, TFP shock, Total factor productivity, Unemployment, unemployment rate, Wages, WP
Summary and metadata drawn from the IMF Working Paper "Emerging Market Business Cycles: The Role of Labor Market Frictions" by Emine Boz, Ceyhun Bora Durdu, and Nan Li (October 2, 2012).