Working Paper: NBER ID: w19683
Authors: Guillermo Calvo; Fabrizio Coricelli; Pablo Ottonello
Abstract: This paper discusses three policy tools to mitigate jobless recoveries during financial crises: inflation, real currency depreciation, and credit-recovery policies. Using a sample of financial crises in Emerging Market economies, we document that large inflationary spikes appear to help unemployment to get back to pre-crisis levels. However, the counterpart of inflation is sizably lower real wages. Hence, inflation does not prevent wage earners as a whole from getting hit by financial crises. Interestingly, neither the change in the real exchange rate nor the change in output composition (tradables/nontradables), from output peak to recovery point, displays a statistically significant relationship with inflation or jobless recovery. This suggests that currency depreciation can help reduce unemployment only insofar as it is associated with inflation, and that jobless recovery is likely due to nominal wage rigidity. The paper also shows that measures to reactivate credit flows could be beneficial to wage earners as a whole, as measured by the real wage bill.
Keywords: jobless recovery; financial crises; inflation; credit recovery; emerging markets
JEL Codes: E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal wage rigidity (J31) | exacerbated unemployment during recoveries (J64) |
| high inflation (E31) | lower unemployment (J68) |
| high inflation (E31) | wageless recovery (J38) |
| credit recovery (A21) | improved outcomes in wage bill (J38) |
| credit recovery (A21) | positive effect on employment and wages (J68) |