The political economy of twin deficits and wage setting centralization

Hamzeh Arabzadeh Jamali

No 2016017, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: This paper contributes to the literature on current account imbalances. Econometric analysis of the paper finds evidence that wage centralization, in a cross-section of industrialized economies, significantly improve current accounts through reducing budget deficits. To explain this empirical finding, the paper provides a political economy framework in which the government follows preferences of N-sector workers (majority rule). An increase in public and so, current account deficits by issuing external public debt leads to real appreciation of the currency. As between-sector mobility is constrained by friction in the labor market, wages in N-sector rises. The opposite happens if the government improves the two balances by rising its saving. Thus, N-sector workers relatively support (oppose) more a rise (reform) in the two deficits. Centralization of wage bargaining moderates the benefit and costs from such twin-deficit policies by reducing the responsiveness of sectoral wage with respect to sectoral prices. Thus, the more centralized is the wage determination, the less N-sector workers support (oppose) a rise (reform) in the two deficits. Correspondingly, more centralized wage bargaining reduces the government's political incentive (cost) to deteriorate (reform) the external balance through the fiscal balance.

Keywords: Twin deficits; Current account imbalances; Dutch disease; Search and Match; Wage bargaining Centralization; Real Exchange rate (search for similar items in EconPapers)
JEL-codes: E62 F32 F41 J31 J51 J6 (search for similar items in EconPapers)
Pages: 70
Date: 2016-08-27
New Economics Papers: this item is included in nep-lab, nep-mac, nep-opm and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://sites.uclouvain.be/econ/DP/IRES/2016017.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2016017

Access Statistics for this paper

More papers in LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Virginie LEBLANC ().