Description

Emerging economies have high shares of self-employed individuals running owner-only firms
who, in contrast to many salaried firms, have little access to formal financing and therefore rely
on informal financing (input credit) from other firms. We build a small open economy real
business 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 replicates
the cyclical behavior of sectoral employment, formal credit, and the main macroeconomic
aggregates in emerging economies. We show that a countercyclical macroprudential policy that
reduces formal credit fluctuations has positive though quantitatively limited effects on
consumption and output volatility, but generates larger unemployment fluctuations in response
to productivity shocks; the same policy increases labor market and aggregate volatility in
response to net worth shocks. The link between input credit and the labor market structure---key
for capturing the cyclical dynamics of labor and credit markets in the data---plays a crucial role
for these results.

More publications in this series: Working Papers

More publications by: Alan Finkelstein Shapiro ; Andres Gonzalez