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National Labour Markets, International Factor Mobility and Macroeconomic Instability

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  • Aloi, Marta
  • Lloyd-Braga, Teresa

Abstract

We analyze how global economic integration of factor markets affects the stability of the macroeconomy, with respect to expectations-driven fluctuations, when countries differ in their labor market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labor movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6015.

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Date of creation: Dec 2006
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Handle: RePEc:cpr:ceprdp:6015

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Keywords: fluctuations driven by self fulfilling expectations; indeterminacy; international capital movements; international labour movements; unemployment;

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  1. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
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Cited by:
  1. Jean-Michel Grandmont, 2008. "Negishi-Solow efficiency wages, unemployment insurance and dynamic deterministic indeterminacy," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(2), pages 247-272.
  2. Patrick-Antoine Pintus, 2007. "Procyclical International Capital Flows, Debt Overhang And Volatility," Working Papers halshs-00353596, HAL.
  3. Kunieda, Takuma & Shibata, Akihisa, 2012. "Financial Globalization and Animal Spirits," MPRA Paper 36123, University Library of Munich, Germany.

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