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

Timo Bettendorf and Miguel A. León‐ledesma
Authors registered in the RePEc Author Service: Miguel Leon-Ledesma

Journal of Money, Credit and Banking, 2019, vol. 51, issue 2-3, 617-653

Abstract: 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 three‐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 eight 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.

Date: 2019
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Citations: View citations in EconPapers (1)

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https://doi.org/10.1111/jmcb.12517

Related works:
Working Paper: German Wage Moderation and European Imbalances: Feeding the Global VAR with Theory (2015)
Working Paper: German wage moderation and European imbalances: Feeding the global VAR with theory (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:51:y:2019:i:2-3:p:617-653

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