IDEAS home Printed from https://ideas.repec.org/p/aue/wpaper/1517.html
   My bibliography  Save this paper

Labour Market Regulation, Fiscal Consolidation, and the Success of Current Account Adjustments

Author

Listed:
  • Antonis Adam
  • Panos Hatzipanayotou

    (Athens University of Economics and Business)

  • Thomas Moutos

    (DIEES, AUEB)

Abstract

In this paper we argue that the strictness of labour market regulations can interact with the mode of fiscal consolidation (tax- based versus spending-based fiscal adjustments) to affect whether current account adjustments are successful. Using data from 81 countries, we are able to identify 147 episodes of current account adjustments, of which 69 are classified as successful. On the basis of a discrete choice cross- sectional time- series model we find that the co-existence of tax-based fiscal consolidations and strict labour market regulations reduces significantly the probability of successful current account adjustments.

Suggested Citation

  • Antonis Adam & Panos Hatzipanayotou & Thomas Moutos, 2015. "Labour Market Regulation, Fiscal Consolidation, and the Success of Current Account Adjustments," DEOS Working Papers 1517, Athens University of Economics and Business.
    • Handle: RePEc:aue:wpaper:1517
    as

    Download full text from publisher

    File URL: http://wpa.deos.aueb.gr/docs/Labour.Market.Regulation.pdf
    File Function: First version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    2. Carlin, Wendy & Glyn, Andrew & Van Reenen, John, 2001. "Export Market Performance of OECD Countries: An Empirical Examination of the Role of Cost Competitiveness," Economic Journal, Royal Economic Society, vol. 111(468), pages 128-162, January.
    3. Marc J. Melitz & Daniel Trefler, 2012. "Gains from Trade When Firms Matter," Journal of Economic Perspectives, American Economic Association, vol. 26(2), pages 91-118, Spring.
    4. John Bluedorn & Daniel Leigh, 2011. "Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 582-602, November.
    5. Antonis Adam & Margarita Katsimi & Thomas Moutos, 2012. "Inequality and the import demand function," Oxford Economic Papers, Oxford University Press, vol. 64(4), pages 675-701, October.
    6. Maria Milesi-Ferretti, Gian & Razin, Assaf, 1998. "Sharp reductions in current account deficits An empirical analysis," European Economic Review, Elsevier, vol. 42(3-5), pages 897-908, May.
    7. Guillermo A. Calvo, 1998. "CAPITAL FLOWS AND CAPITAL-MARKET CRISES: The Simple Economics of Sudden Stops," Journal of Applied Economics, Taylor & Francis Journals, vol. 1(1), pages 35-54, November.
    8. Leo De Haan & Hubert Schokker & Anastassia Tcherneva, 2008. "What Do Current Account Reversals in OECD Countries Tell Us About the US Case?," The World Economy, Wiley Blackwell, vol. 31(2), pages 286-311, February.
    9. Andrew K. Rose, 2011. "Exchange Rate Regimes in the Modern Era : Fixed, Floating, and Flaky," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 652-672, September.
    10. Giuseppe Bertola & Francine Blau & Lawrence Kahn, 2007. "Labor market institutions and demographic employment patterns," Journal of Population Economics, Springer;European Society for Population Economics, vol. 20(4), pages 833-867, October.
    11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    12. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 546-569, June.
    13. Adriana Kugler & Maurice Kugler, 2009. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 335-358, January.
    14. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    15. Menzie D. Chinn & Shang-Jin Wei, 2008. "A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?," NBER Working Papers 14420, National Bureau of Economic Research, Inc.
    16. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 2010/121, International Monetary Fund.
    17. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
    18. Buiter, Willem H, 1988. "Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy," Oxford Economic Papers, Oxford University Press, vol. 40(2), pages 220-245, June.
    19. Áureo De Paula & José A. Scheinkman, 2011. "The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages 8-26, May.
    20. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
    21. Antonis Adam & Thomas Moutos, 2017. "The Modality of Fiscal Consolidation and Current Account Adjustment," CESifo Economic Studies, CESifo Group, vol. 63(2), pages 162-181.
    22. World Bank, 2011. "World Development Indicators 2011," World Bank Publications - Books, The World Bank Group, number 2315, April.
    23. Bernardina Algieri & Thierry Bracke, 2011. "Patterns of Current Account Adjustment—Insights from Past Experience," Open Economies Review, Springer, vol. 22(3), pages 401-425, July.
    24. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2010. "Productivity shocks, budget deficits and the current account," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1562-1579, December.
    25. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
    26. Morrison, Kevin M., 2009. "Oil, Nontax Revenue, and the Redistributional Foundations of Regime Stability," International Organization, Cambridge University Press, vol. 63(1), pages 107-138, January.
    27. Clovis Kerdrain & Isabell Koske & Isabelle Wanner, 2010. "The Impact of Structural Policies on Saving, Investment and Current Accounts," OECD Economics Department Working Papers 815, OECD Publishing.
    28. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
    29. John Maynard Keynes, 2010. "Essays in Persuasion," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-59072-8, August.
    30. Catherine L. Mann, 2004. "The US Current Account, New Economy Services, and Implications for Sustainability," Review of International Economics, Wiley Blackwell, vol. 12(2), pages 262-276, May.
    31. O Blanchard & A Landier, 2002. "The Perverse Effects of Partial Labour Market Reform: fixed--Term Contracts in France," Economic Journal, Royal Economic Society, vol. 112(480), pages 214-244, June.
    32. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonis Adam & Thomas Moutos, 2017. "The Modality of Fiscal Consolidation and Current Account Adjustment," CESifo Economic Studies, CESifo Group, vol. 63(2), pages 162-181.
    2. Nizar, Muhammad Afdi, 2013. "Pengaruh Defisit Anggaran Terhadap Defisit Transaksi Berjalan Di Indonesia [The Effect of Budget Deficit on Current Accounts Deficit in Indonesia]," MPRA Paper 65609, University Library of Munich, Germany.
    3. Leonor Coutinho & Alessandro Turrini & Stefan Zeugner, 2018. "Methodologies for the Assessment of Current Account Benchmarks," European Economy - Discussion Papers 086, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 719-734.
    5. Afonso, António & Huart, Florence & Tovar Jalles, João & Stanek, Piotr, 2022. "Twin deficits revisited: A role for fiscal institutions?," Journal of International Money and Finance, Elsevier, vol. 121(C).
    6. Hamzeh Arabzadeh, 2016. "The political economy of twin deficits and wage setting centralization," LIDAM Discussion Papers IRES 2016017, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    7. Jan Behringer & Till van Treeck, 2013. "Income distribution and current account: A sectoral perspective," IMK Working Paper 125-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Mr. Luis M. Cubeddu & Signe Krogstrup & Gustavo Adler & Mr. Pau Rabanal & Mai Dao & Mrs. Swarnali A Hannan & Luciana Juvenal & Ms. Carolina Osorio-Buitron & Cyril Rebillard & Mr. Daniel Garcia-Macia &, 2019. "The External Balance Assessment Methodology: 2018 Update," IMF Working Papers 2019/065, International Monetary Fund.
    9. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126, Decembrie.
    10. Menzie D. Chinn & Barry Eichengreen & Hiro Ito, 2014. "A forensic analysis of global imbalances," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 465-490.
    11. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2012. "External adjustment and the global crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 252-265.
    12. Blaise Gnimassoun & Valérie Mignon, 2013. "Current-account adjustments and exchange-rate misalignments," Working Papers hal-04141182, HAL.
    13. José García-Solanes & Jesús Rodríguez-López & José Torres, 2011. "Demand Shocks and Trade Balance Dynamics," Open Economies Review, Springer, vol. 22(4), pages 739-766, September.
    14. S M Ali Abbas & Jacques Bouhga-Hagbe & Antonio Fatás & Paolo Mauro & Ricardo C Velloso, 2011. "Fiscal Policy and the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 603-629, November.
    15. Guy Debelle & Gabriele Galati, 2007. "Current Account Adjustment and Capital Flows," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 989-1013, November.
    16. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense [‘Temporary and permanent government spending in an open economy: some evidence for the United Kingdom’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(48), pages 598-638.
    17. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
    18. Mr. Yehenew Endegnanew & Ms. Therese Turner-Jones & Charles Amo Yartey, 2012. "Fiscal Policy and the Current Account: Are Microstates Different?," IMF Working Papers 2012/051, International Monetary Fund.
    19. Jan Behringer & Till van Treeck, 2023. "The corporate sector and the current account," Oxford Economic Papers, Oxford University Press, vol. 75(3), pages 826-857.
    20. Christian Breuer & Chang Woon Nam, 2020. "Fiscal Consolidation and the Current Account: OECD Evidence," CESifo Working Paper Series 8071, CESifo.

    More about this item

    Keywords

    Current account adjustment; labour market regulations; fiscal consolidation;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aue:wpaper:1517. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ekaterini Glynou (email available below). General contact details of provider: https://edirc.repec.org/data/diauegr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.