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Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski
In the last decade, over half of the EU countries in the euro area or with currencies pegged to the euro were hit by large risk premium shocks. Previous papers have focused on the impact of these shocks on demand. This paper, by contrast, focuses on the impact on supply. We show that risk premium shocks reduce the output level that maximizes profit. They also lead to unemployment surges, as firms are forced to cut costs when financing becomes expensive or is no longer available. As a result, all countries with risk premium shocks saw unemployment surge, even as euro area core countries managed to contain unemployment as firms hoarded labor during the downturn. Most striking, wage bills in euro area crisis countries and the Baltics declined even faster than GDP, whereas in core euro area countries wage shares actually increased.
Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski

rates surged, while in others they remained modest ( Figure 1.2 ). Eleven countries had an “unemployment surge” defined as an increase in unemployment of at least five percentage points. 4 The Baltic countries, Croatia, Greece, Spain, Portugal, Ireland, and Cyprus all stand out as countries that experienced very sharp unemployment increases; while in northern European countries unemployment increases were more modest. In Germany, unemployment did not increase at all. Figure 1.2. Unemployment Rate (Percent) The paper shows that these unemployment surges

International Monetary Fund. External Relations Dept.

In the 1990s, Argentina was held up as a model of successful economic stabilization and market reform. But in December 2001, the country plunged into a devastating crisis when it defaulted on its sovereign debt. Soon afterward, it abandoned the convertibility regime under which the peso had been pegged to the U.S. dollar since 1991. Output collapsed, unemployment surged, and political and social turmoil ensued. These events raised questions about the IMF’s role. On July 29, the IMF’s Independent Evaluation Office (IEO) released its report on the handling of the crisis. Shinji Takagi, IEO Advisor and team leader for the report, spoke with Christine Ebrahim-zadeh of the IMF Survey about the report’s findings.

Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski

Front Matter Page European and Western Hemisphere Departments Contents 1 Introduction 2 Risk Premia and Output: a Stylized Model 3 The Role of Risk Premium Shocks in the post-2008 Unemployment Surges 3.1 All Countries with Risk Premium Shocks had Unemployment Surges; and all Countries with Unemployment Surges had Risk Shocks 3.2 Risk Premium Shocks Help Explain why Countries with Similar GDP Declines had Very Different Unemployment Rate Movements 4 The Baltics 2008/2009 Crisis 4.1 The Crisis 4.2 What was Behind the Risk Premium Shocks

Angana Banerji, Mr. Sergejs Saksonovs, Ms. Huidan Huidan Lin, and Mr. Rodolphe Blavy
The SDN will assess the youth unemployment problem in advanced European countries, with a special focus on the euro area. It will document the main trends in youth and adult unemployment in 22 European countries before and after the global financial crisis. It will identify the main drivers of youth and adult unemployment, focusing in particular on the role of the business cycle and structural characteristics of the labor market. It will outline the main elements of a comprehensive strategy to address the problem.
International Monetary Fund. External Relations Dept.
The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy. www.imf.org/external/pubs/ft/survey/so/home.aspx
Mr. Andreas Billmeier
The output gap-which measures the deviation of actual output from its potential-is frequently used as an indicator of slack in an economy. This paper estimates the Finnish output gap using various empirical methods. It evaluates these methods against economic history and each other by a simulated out-of-sample forecasting exercise for Finnish CPI inflation. Only two gap measures, stemming from a frequency domain approach and the Blanchard-Quah decomposition, perform better than the naïve prediction of no change in inflation-but do not improve upon a simple autoregressive forecast. The pronounced volatility of output in Finland makes it particularly difficult to estimate potential output, producing considerable uncertainty about the size (and sign) of the gap.