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

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 matchi...

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Bibliographic Details
Published inJournal of money, credit and banking Vol. 51; no. 2-3; pp. 617 - 653
Main Authors BETTENDORF, TIMO, LEÓN‐LEDESMA, MIGUEL A.
Format Journal Article
LanguageEnglish
Published Columbus Ohio State University Press 01.03.2019
Subjects
DSGE
Economic models
Economic reform
European imbalances
F10
F32
F41
German wage moderation
global VAR
Labor market
Moderation
sign restrictions
Wage & price controls
Germany
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Summary: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.
Bibliography:The authors are grateful to an anonymous referee, Sandra Eickmeier, Carlo Favero, Reinhold Heinlein, Hans‐Martin Krolzig, Eric Leeper, Ron Smith, and Tong Wang as well as participants at the Deutsche Bundesbank research seminar, the 17th International Conference on Macroeconomic Analysis and International Finance, the European Meeting of the Econometric Society, as well as the DIW Macro‐econometric Workshop for valuable comments and suggestions. This paper represents the authors' personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank or its staff.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12517