The effect of financial crises on distribution and employment

Austrian National Bank

This project is granted by the "Dr.-Heinz-Kienzl-Preis", jointly awarded by the Austrian Central Bank and WU. The aim of the project is to analyze the effects of financial crises on income distribution and employment. Financial crises have become more frequent throught the world economy in the past two decades. While there are extensive policy debates on how to prevent these from happening, a sober view will concede that, despite measures to be taken, financial crises may well continue to occur frequently. High current account deficits in USA, but also in some emerging economies such as Hungary and Turkey, even suggest that they may not be far away. If so, it is important to undertand the effects that financial crises have.

This research proposal focuses on the effects on functional income distribution and employment, an aspect so far neglected in the literature. Since most volatility in the financial markets can be observed in emerging markets, the empirical analysis will be carried out for the most dynamic of these emerging markets (Argentina, Brazil, Chile, Mexico, Turkey, Indonesia, Korea, Malaysia, the Philippines, and Thailand).

This analysis is expected to generate insights relevant for emerging economies as well as for developed economies. Firstly, financial crises have become a more frequent phenomon in developed countries as well. The extensive role of governments in these countries has yet cushioned the effects, but presumably the effects will be structurally similar. Secondly, the adverse effects of these financial crises have implications beyond the borders of the emerging markets. If financial crises are generating persistent adverse effects on income distribution, and employment in the major exporting countries of the world economy, these will have spill over effects on advanced economies, particularly the new membver states of the EU, through international competition and financial flows.