Which factor bears the cost of currency crises?

Elsa Orgiazzi () and Paul Maarek

No 810, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: market is characterized by search frictions and goods market by shadow entry costs. Our model describes two sectoral reallocation effects resulting from exchange rate depreciation and capital outflows. These two sectoral e ffects can move in opposite directions, depending on whether the tradable sector is capital or labour intensive. Our model also highlights that crises erode the bargaining power of workers so that within sectors, crises lower the labour share. We also perform estimations on manufacturing sectoral panel data for 20 countries which have experienced currency crises. The empirical analysis concludes that currency crises lower the aggregate manufacturing labour share by 2 points on average and that this decline is not explained by reallocations across manufacturing sectors.

Date: 2010
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