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Emerging economies are characterized by higher consumption and real wage variability relative to output and a strongly countercyclical current account. A real business cycle model of a small open economy that embeds a Mortensen-Pissarides type of search-matching frictions and countercyclical interest rate shocks can jointly account for these regularities. In the face of countercyclical interest rate shocks, search-matching frictions increase future employment uncertainty, improving workers’ incentive to save and generating a greater response of consumption and the current account. Higher consumption response in turn feeds into larger fluctuations in the workers’ bargaining power while the interest rates shocks lead to variations in the firms’ willingness to hire; both of which contribute to a highly variable real wage.

Business & Economics --- Economic Theory --- Business cycles. --- Business forecasting. --- Business --- Business forecasts --- Forecasting, Business --- Economic cycles --- Economic fluctuations --- Forecasting --- Economic forecasting --- Cycles --- Business cycles --- Labor market --- Econometric models --- E-books --- Employees --- Market, Labor --- Supply and demand for labor --- Markets --- Supply and demand --- Labor --- Macroeconomics --- Production and Operations Management --- Open Economy Macroeconomics --- Economic Growth of Open Economies --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Financial Markets and the Macroeconomy --- Demand and Supply of Labor: General --- Wages, Compensation, and Labor Costs: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Macroeconomics: Consumption --- Saving --- Wealth --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Labour --- income economics --- Labor markets --- Consumption --- Total factor productivity --- National accounts --- Economics --- Industrial productivity --- Mexico