Working Papers

Equilibrium Unemployment during Financial Crises

AUTHOR(s): Fernandez, Andres , Herreno, Juan
PUBLISHED: February 2013
RELATED TOPICS: Macroeconomics


Financial crises in both emerging and developed economies have been character- ized by large output drops and spikes in unemployment and interest rates. To account for these stylized facts this paper builds a business cycle model where financial and la- bor market frictions interact as occasionally binding borrowing constraints and search frictions. The model is calibrated to a Sudden Stop-prone emerging economy and also to some peripheral European economies in the recent crisis. The model accounts for unemployment dynamics both during crises and at regular business cycle frequencies. The paper also assesses the welfare implications of policies that reduce real minimum wages during crises.

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