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Emerging Market Business Cycles: The Role of Labor Market Frictions
Authors:EMINE BOZ  C. BORA DURDU  NAN LI
Abstract: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.
Keywords:E24  E44  F41  F43  emerging markets  labor markets  business cycles  search frictions
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