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

Bettendorf, Timo, Leon-Ledesma, Miguel A. (2019) German Wage Moderation and European Imbalances: Feeding the Global VAR with Theory. Journal of Money, Credit, and Banking, 51 (2-3). pp. 617-653. ISSN 1538-4616. (doi:10.1111/jmcb.12517) (KAR id:63206)

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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 a 3-region open economy New Keynesian model with search and matching frictions from which we derive robust sign restrictions for wage bargaining and matching efficiency shocks which we term wage moderation shocks. We impose these restrictions on a Global VAR consisting of Germany and 8 EMU countries to identify a wage moderation shock in Germany. Our results show that, although the German current account was significantly affected by wage moderation shocks, their contribution to European current account imbalances was negligible. We conclude that the German labor market reforms cannot be the lone driver of European imbalances.

Item Type: Article
DOI/Identification number: 10.1111/jmcb.12517
Subjects: H Social Sciences > HB Economic Theory
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Miguel Leon-Ledesma
Date Deposited: 04 Sep 2017 12:16 UTC
Last Modified: 16 Feb 2021 13:48 UTC
Resource URI: (The current URI for this page, for reference purposes)
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