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Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies

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  • Mr. Romain A Duval
  • Davide Furceri
  • João Tovar Jalles

Abstract

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

Suggested Citation

  • Mr. Romain A Duval & Davide Furceri & João Tovar Jalles, 2021. "Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies," IMF Working Papers 2021/054, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/054
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    2. Christos Mavrogiannis & Athanasios Tagkalakis, 2022. "The short term effects of structural reforms and institutional improvements in OECD economies," Working Papers 306, Bank of Greece.

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    More about this item

    Keywords

    external imbalances; structural reforms; product market; labor market.; WP; product market deregulation; reform shock; product market reform; product market regulation; policy area;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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