Quantifying the Germany Shock: Structural Reforms and Spillovers in a Currency Union

Harald Fadinger, Philipp Herkenhoff and Jan Schymik

No 18225, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the effects of unilateral structural reforms within a currency union. Focusing on the surge of German competitiveness following the introduction of the Euro, we first provide reduced-form causal evidence supporting the notion that German structural labor-market reforms in the early 2000s led to a crowding-out of manufacturing employment in other Eurozone economies. To assess the impact of this German competitiveness shock, we build a quantitative multi-sector trade model that features downward nominal wage rigidities, endogenous labor supply, unemployment-insurance benefits and international savings. The fixed nominal exchange rate can create binding nominal rigidities in response to a foreign real supply shock -- like the one prompted by the German reforms -- resulting in significant contraction of manufacturing sectors and increased involuntary unemployment across other Eurozone countries. We consider a number of counterfactual scenarios, such as the impact of German labor-market reforms in the absence of a fixed exchange-rate regime, the role of coordinated reforms within the Eurozone and a higher average inflation rate.

Keywords: Euro; Quantitative trade models (search for similar items in EconPapers)
JEL-codes: F16 F41 F45 (search for similar items in EconPapers)
Date: 2023-06
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Working Paper: Quantifying the Germany Shock: Structural Reforms and Spillovers in a Currency Union (2023)
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