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International Trade and Macroeconomic Dynamics with Labor Market Frictions

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  • Matteo Cacciatore

    (HEC Montreal)

Abstract

This paper studies how labor market frictions affect the consequences of trade integration in a two-country, stochastic, general equilibrium model of trade and macroeconomic dynamics with heterogeneous firms, endogenous producer entry, and frictional labor markets. The model successfully reproduces important empirical regularities that characterize trade integration both in the long run and over the business cycle. Two key results emerge. First, trade integration is always beneficial for welfare by inducing higher productivity, but unemployment can temporarily rise as trade barriers are lowered. Gains from trade are smaller in countries with more rigid labor markets, as production gradually shifts toward more flexible economies. Second, trade integration has important business cycle consequences. In contrast to traditional international business cycle models, but consistent with the data, the model correctly predicts that stronger trade linkages lead to increased business cycle synchronization. However, the strength of this effect and the consequences for output volatility depend on the labor market characteristics of integrating partners.

Suggested Citation

  • Matteo Cacciatore, 2012. "International Trade and Macroeconomic Dynamics with Labor Market Frictions," 2012 Meeting Papers 875, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:875
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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