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

Timo Bettendorf

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: 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.

JEL-codes: F10 F32 F41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-eec and nep-opm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79710

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