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Currency devaluation with dual labor market : Which perspectives for the Euro Zone ?

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  • Amélie Barbier-Gauchard
  • Francesco De Palma
  • Giuseppe Diana
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    Abstract

    In this paper, we assume a world of two countries in a fixed exchange rate system. The main difference between the two countries lies in the features of their labor markets. In the home country, we assume the existence of a dual labor market, with formal and informal sectors. In the foreign country, the labor market is homogeneous and characterized by a nominal wage rigidity. In this context, the situation of labor market in each country is not optimal through a misallocation of workers between sectors in domestic economy, and unemployment in foreign economy. Our article shows that a devaluation of domestic currency implies a fall in production in each country, an increase in unemployment in foreign economy and a worse reallocation of workers by a growth of informal sector in domestic economy.

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    Bibliographic Info

    Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2012-04.

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    Date of creation: 2012
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    Handle: RePEc:ulp:sbbeta:2012-04

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    Related research

    Keywords: efficiency wage; dualism; exchange rate; devaluation.;

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    1. Mattesini Fabrizio & Rossi Lorenza, 2008. "Optimal monetary policy in economies with dual labor markets," wp.comunite 0037, Department of Communication, University of Teramo.
    2. David Cook & Hiromi Nosaka, 2005. "Dual labor markets and business cycles," Working Paper Series 2006-36, Federal Reserve Bank of San Francisco.
    3. Claudia Curi & Cinzia Daraio & Patrick Llerena, 2012. "University Technology Transfer: How (in-)efficient are French universities?," Working Papers of BETA 2012-02, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Olivier Cardi & Romain Restout, 2014. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Open Economies Review, Springer, vol. 25(2), pages 373-406, April.
    5. Konstantinos POULIAKAS & Ioannis THEODOSSIOU, 2010. "Differences in the job satisfaction of high-paid and low-paid workers across Europe," International Labour Review, International Labour Organization, vol. 149(1), pages 1-29, 03.
    6. Dimitri G. Demekas, 1990. "Labor Market Segmentation in a Two-Sector Model of An Open Economy," IMF Working Papers 90/33, International Monetary Fund.
    7. Hazans, Mihails, 2011. "Informal workers across Europe : evidence from 30 European countries," Policy Research Working Paper Series 5912, The World Bank.
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