Macroprudential Policy and Labor Market Dynamics in Emerging Economies

Emerging economies have high shares of self-employed individuals running owner-only firmswho, in contrast to many salaried firms, have little access to formal financing and therefore relyon informal financing (input credit) from other firms. We build a small open economy realbusiness cycle model with labor and financial market frictions where formal credit markets,informal credit, and the structure of the labor market interact. The model successfully replicatesthe cyclical behavior of sectoral employment, formal credit, and the main macroeconomicaggregates in emerging economies. We show that a countercyclical macroprudential policy thatreduces formal credit fluctuations has positive though quantitatively limited effects onconsumption and output volatility, but generates larger unemployment fluctuations in responseto productivity shocks; the same policy increases labor market and aggregate volatility inresponse to net worth shocks. The link between input credit and the labor market structure---keyfor capturing the cyclical dynamics of labor and credit markets in the data---plays a crucial rolefor these results.
Publication date: April 2015
ISBN: 9781475563641
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Economics- Macroeconomics , Economics / General , International - Economics , Business cycles , self-employment , labor search frictions , financial frictions , macroprudential policy

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