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Labor Market Reforms and Current Account Imbalances – Beggar-thy-neighbor Policies in a Currency Union?

Listed author(s):
  • Ansgar Belke
  • Timo Baas

Member countries of the European Monetary Union (EMU) initiated wide-ranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggarthy- neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances.

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File URL: http://www.rome-net.org/RePEc/rmn/wpaper/rome-wp-2014-07.pdf
File Function: First version, 2014
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Paper provided by ROME Network in its series ROME Working Papers with number 201407.

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Length: 46 pages
Date of creation: Sep 2014
Handle: RePEc:rmn:wpaper:201407
Contact details of provider: Web page: http://www.rome-net.org

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