Labor market reforms, precautionary savings, and global imbalances

Brigitte Hochmuth, Stéphane Moyen and Nikolai Stähler

No 13/2019, Discussion Papers from Deutsche Bundesbank

Abstract: How do labor market reforms affect international competitiveness and net foreign assets? To answer this question, we build a two-region RBC model with labor market frictions, idiosyncratic consumption risk, and limited cross-sectional heterogeneity to establish a direct link between labor market reforms and changes in net foreign assets via a precautionary savings channel. We apply the model to simulate far-reaching labor market reforms in Germany during the mid-2000s. We find that reducing the generosity of unemployment benefits decreases wages, fosters employment and augments competitiveness as well as trade. In addition, we can explain a significant share of the observed increase in German net foreign assets. A standard representative agent framework is not able to generate any notable effects on net foreign assets and the current account.

Keywords: unemployment benefits reform; current account imbalances; precautionary savings; Hartz reform (search for similar items in EconPapers)
JEL-codes: E21 E24 F16 F41 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-dge, nep-eec, nep-int, nep-lab, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:132019

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