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German Wage Moderation and European Imbalances: Feeding the Global VAR with Theory

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  • Timo Bettendorf
  • Miguel A. Leon-Ledesma

Abstract

German labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the Euro Area. We investigate this hypothesis quantitatively. We develop an open economy New Keynesian model with search and matching frictions from which we derive robust sign restrictions for a wage bargaining shock. We then impose these restrictions on a Global VAR consisting of Germany and 8 EMU countries to identify a wage bargaining shock in Germany. Our results show that, although the German current account was significantly affected by wage bargaining shocks, their contribution to European current account imbalances was negligible. We conclude that the reduction in bargaining power of German unions after labor market reforms cannot be the lone driver of European imbalances.

Suggested Citation

  • Timo Bettendorf & Miguel A. Leon-Ledesma, 2015. "German Wage Moderation and European Imbalances: Feeding the Global VAR with Theory," Studies in Economics 1510, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:1510
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    Cited by:

    1. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2016. "German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 307-324.
    2. Konstantinos Chisiridis & Kostas Mouratidis & Theodore Panagiotidis, 2018. "The North-South Divide, the Euro and the World," Working Papers 377, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    3. Niels Gilbert & Sebastiaan Pool, 2020. "Sectoral allocation and macroeconomic imbalances in EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(4), pages 945-984, November.

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    More about this item

    Keywords

    European imbalances; German wage moderation; DSGE; Global VAR; sign restrictions;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • 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

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