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Feeding the Global VAR with theory: Is German wage moderation to blame for European imbalances?

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  • Bettendorf, Timo
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    Abstract

    This paper analyses the importance of German wage moderation in the context of European imbalances. Using information from a New Keynesian small open economy model with labor market frictions, we derive sign restrictions for a wage markup shock. This information enables us to identify a German wage markup shock by imposing restrictions on the impulse response functions of German variables in a Global VAR model. We find that negative German wage markup shocks do generally cause an improvement of the domestic trade balance and a deterioration of foreign trade balances in the Euro Area. However, they account only for a limited proportion of trade balance forecast error variances. Hence, German wage moderation cannot be the lone driver of European imbalances. --

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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79710.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79710

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    1. Dées, Stéphane & di Mauro, Filippo & Pesaran, Hashem & Smith, Vanessa, 2005. "Exploring the international linkages of the euro area: a global VAR analysis," Working Paper Series, European Central Bank 0568, European Central Bank.
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    7. Christopoulos, Dimitris & León-Ledesma, Miguel A., 2010. "Current account sustainability in the US: What did we really know about it?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(3), pages 442-459, April.
    8. Lukas Vogel, 2011. "Structural reforms and external rebalancing in the euro area: a model-based analysis," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 443, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    9. Juan F. Rubio-Ram�rez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 665-696.
    10. Alessandro Roncaglia, 2010. "Introduction," PSL Quarterly Review, Economia civile, Economia civile, vol. 63(252), pages 3-5.
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