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The Political Economy of Exchange Rate Regimes and External (Im)Balances: The Role of Labor Market Institutions

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  • Vytautas Kuokštis

    (Vilnius University)

  • Simonas Algirdas Spurga

    (Vilnius University)

Abstract

External (im)balances are key to the evolution of financial crises and international disputes, yet the role of exchange rate regimes in shaping trade and current account balance remains contested. We contend that this relationship depends on the institutional environment: exchange rate rigidity fosters trade and current account surpluses under flexible labor market institutions but leads to deficits under rigid labor markets. The argument is supported by empirical analysis of a global time-series cross-sectional sample that includes both advanced economies and developing countries. The findings are robust across diverse modeling approaches and alternative measures of labor market flexibility.

Suggested Citation

  • Vytautas Kuokštis & Simonas Algirdas Spurga, 2025. "The Political Economy of Exchange Rate Regimes and External (Im)Balances: The Role of Labor Market Institutions," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 67(3), pages 682-722, September.
    • Handle: RePEc:pal:compes:v:67:y:2025:i:3:d:10.1057_s41294-025-00255-3
    DOI: 10.1057/s41294-025-00255-3
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