Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies
IMF Working Papers, February 26, 2021
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- Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies
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Bibliographic details
- Authors: Romain A Duval, Davide Furceri, João Tovar Jalles
- Published: February 26, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513570747.001
Overview
- Study explores the impact of major labor and product market reforms on current account dynamics.
- Uses a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries.
- Coverage: 26 advanced economies over the past four decades.
Main findings
- Product market deregulation is associated with a weakening of the current account.
- Labor market deregulation is associated with an improvement in the current account.
- These effects are transitory.
- Effects are driven by both saving and investment responses.
Mechanisms and drivers
- Both saving responses and investment responses contribute to the observed current account effects following reforms.
- The analysis is based on narrative identification of major reform episodes in employment protection (regular workers) and product market regulation (non-manufacturing industries).
Conditional effects
- Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions.
Theoretical consistency
- Results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.
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- Working Paper