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Feeding the Global VAR with theory: Is German wage moderation to blame for European imbalances?

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  • Bettendorf, Timo
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    This paper analyses the importance of German wage moderation in the context of European imbalances. Using information from a New Keynesian small open economy model with labor market frictions, we derive sign restrictions for a wage markup shock. This information enables us to identify a German wage markup shock by imposing restrictions on the impulse response functions of German variables in a Global VAR model. We find that negative German wage markup shocks do generally cause an improvement of the domestic trade balance and a deterioration of foreign trade balances in the Euro Area. However, they account only for a limited proportion of trade balance forecast error variances. Hence, German wage moderation cannot be the lone driver of European imbalances.

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    File URL: https://www.econstor.eu/bitstream/10419/79710/1/VfS_2013_pid_827.pdf
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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79710.

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    Date of creation: 2013
    Handle: RePEc:zbw:vfsc13:79710
    Contact details of provider: Web page: http://www.socialpolitik.org/
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    1. Alessandro Roncaglia, 2010. "Introduction," PSL Quarterly Review, Economia civile, vol. 63(252), pages 3-5.
    2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
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    5. Jordi Galí & Frank Smets & Rafael Wouters, 2011. "Unemployment in an Estimated New Keynesian Model," Working Papers 541, Barcelona Graduate School of Economics.
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    7. Lukas Vogel, 2011. "Structural reforms and external rebalancing in the euro area: a model-based analysis," European Economy - Economic Papers 2008 - 2015 443, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    8. Wu, Jyh-Lin, 2000. "Mean reversion of the current account: evidence from the panel data unit-root test," Economics Letters, Elsevier, vol. 66(2), pages 215-222, February.
    9. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2002. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Center for Financial Institutions Working Papers 01-38, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2008. "Structural vector autoregressions: theory of identification and algorithms for inference," FRB Atlanta Working Paper 2008-18, Federal Reserve Bank of Atlanta.
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