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Financial Integration and Labor Mobility in a Monetary Union

Xiaofei Ma ()
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Xiaofei Ma: ESSCA School of Management

Chapter Chapter 2 in Crises and Uncertainty in the Economy, 2022, pp 19-49 from Springer

Abstract: Abstract Factor mobility is considered to be a key element for an optimum monetary union. By establishing a two-country model, we study the potential interactions between financial integration and labor mobility. Our results show that while labor mobility reduces unemployment rates, capital mobility in contrast increases unemployment rates in both economies. Compared to labor mobility cost, the effect of capital mobility cost on labor market is secondary. Interestingly, factor mobility might not stimulate production due to the fall in employment. We also calibrate the model to the European Monetary Union and simulate the scenario in the aftermath of 2008 financial crisis. Our counterfactual experiments show that the divergence across member countries might not simply due to asymmetric TFP shocks, but rather their association with the increase of labor mobility costs. This finding also provides potential complements to answer Shimer’s puzzle which states that the unemployment fluctuation generated by search and matching model is much smaller than what we observe in data.

Keywords: Labor mobility; Capital mobility; Monetary union; Search and matching (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-981-19-3296-0_2

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