Would the Euro Area Benefit from Greater Labor Mobility?

Vasco Cúrdia and Fernanda Nechio

No 2024-06, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We assess how within euro area labor mobility impacts economic dynamics in response to shocks. In the analysis we use an estimated two-region monetary union dynamic stochastic general equilibrium model that allows for a varying degree of labor mobility across regions. We find that, in contrast with traditional optimal currency area predictions, enhanced labor mobility can either mitigate or exacerbate the extent to which the two regions respond differently to shocks. The effects depend crucially on the nature of shocks and variable of interest. In some circumstances, even when it contributes to aligning the responses of the two regions, labor mobility may complicate monetary policy tradeoffs. Moreover, the presence and strength of financial frictions have important implications for the effects of labor mobility. If the periphery’s risk premium is more responsive to its indebtedness than our estimates, there are various shocks for which labor mobility may help stabilize the economy. Finally, the euro area’s economic performance following the Global Financial Crisis would not have been necessarily smoother with enhanced labor mobility.

Keywords: monetary unions; labor mobility; credit frictions (search for similar items in EconPapers)
JEL-codes: E3 E4 E44 F41 F45 (search for similar items in EconPapers)
Pages: 57
Date: 2024-03-07
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mig and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:97975

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DOI: 10.24148/wp2024-06

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