The Political Economy of Exchange Rate Regimes and External (Im)Balances: The Role of Labor Market Institutions

Vytautas Kuokštis () and Simonas Algirdas Spurga ()
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Vytautas Kuokštis: Vilnius University
Simonas Algirdas Spurga: Vilnius University

Comparative Economic Studies, 2025, vol. 67, issue 3, No 6, 682-722

Abstract: Abstract External (im)balances are key to the evolution of financial crises and international disputes, yet the role of exchange rate regimes in shaping trade and current account balance remains contested. We contend that this relationship depends on the institutional environment: exchange rate rigidity fosters trade and current account surpluses under flexible labor market institutions but leads to deficits under rigid labor markets. The argument is supported by empirical analysis of a global time-series cross-sectional sample that includes both advanced economies and developing countries. The findings are robust across diverse modeling approaches and alternative measures of labor market flexibility.

Keywords: Exchange rate regimes; Labor market institutions; Labor market flexibility; External imbalances; Trade balance; Current account balance; F32; E24; F16; P16 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41294-025-00255-3

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