Location decisions and Minimum Wages

The paper contributes to the living debate on the controversial effects of minimum wage policy on economic performances, focusing on its impact on firms’ location choice. The question is investigated through a theoretical model, that incorporates features from the new trade literature (Krugman (1991)) and the labor-market literature. In a two-country framework, we model endogenous entry of firms under wage rigidity. In this setting, the impact of an unilateral increase in the home country’s minimum wage is analyzed. The policy shock is shown to have a twofold influence on the relative attractiveness of the home country, simultaneously affecting its relative cost competitiveness and the aggregate demand addressed to firms. Both effects do not necessarily go in the same direction, hence the final effect on firms’ location decisions is ambiguous. We show that it notably depends on the adjustments that occur on the skilled and unskilled labor markets. Our overall results suggest that the design of labor-market policies should take into account their impact on firms’ location decisions, if willing to evaluate their whole consequences in the national economy.Minimum wage, Home Market Effect, Firms location decisions

Labor Market Frictions and the International Propagation Mechanism

The paper investigates the determinants of international business cycle comovement in a two-country Dynamic Stochastic General Equilibrium (DSGE) model featured by monopolistic competition and nominal price rigidity, following so the New Open Economy Macroeconomy (NOEM) literature. Within this framework, we assess the role of labor market search and matching frictions in the international propagation of supply and monetary shocks. Our results show that labor market frictions improve the ability of the New Open Economy Macroeconomy framework to account for international business cycles comovement. In particular, the NOEM model with labor market search is consistent with the international propagation mechanism of monetary shocks identified in the data. Through their impact on labor market dynamics, labor market institutions affect the magnitude of international comovement. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.International business cycles, Search, Labor market institutions, Wage bargaining, International transmission of shocks

Divergence in Labor Market Institutions and International Business Cycles

This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. We first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. We then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, we model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Our conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Our overall results show that taking into account labor market heterogeneity improves our understanding of the quantity puzzle.International business cycle, Search, Labor market institutions, Wage bargaining

Business cycle comovement and labor market institutions: An empirical investigation

This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. We first develop a two-country right-to-manage model of wage bargaining. We find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. We then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Our estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront our results with those found in previous studies. Consistently with our theoretical results, we find that similar labor markets across countries tend to favor more their synchronized cycles. In particular, disparities in tax wedges yields lower GDP co movement. Besides, interactions between labor market institutions do matter, enhancing or dampening the effect of tax wedge divergence on BC synchronization. Our overall results suggest that the impact of distortions in demand-supply labor mechanism should be investigated in international business cycle models.International business cycle, Business cycle synchronization, Labor market institutions, Panel Data Estimation

Overshooting and Exchange Rate Disconnect Puzzle: A Reappraisal

Transitions to floating exchange rate regimes have led to sharp increases in exchange rate volatilities with no corresponding changes in the distribution of macroeconomic fundamentals. In the spirit of Dornbusch (1976), we assess whether nominal exchange rate overshooting is responsible for this phenomenon. As long as uncovered interest rate parity holds, nominal exchange rate overshooting is linked to a persistent fall in the spread between domestic and foreign nominal interest rates. We thus develop a limited participation model in a small open economy setting. With small adjustment costs on money holdings, overshooting substantially contributes to the nominal exchange rate volatility.Exchange rate disconnect puzzle, liquidity effect, overshooting, uncovered interest rate parity

Optimal Fiscal Devaluation

We study fiscal devaluation in a small-open economy with labor market search frictions. Our analysis shows the key role of both dimensions in shaping the optimal tax scheme. By reducing labor market distortions, the tax reform is welfare-improving. Yet, as it makes imports more expensive, fiscal devaluation lowers the agents' purchasing power, which is welfare-reducing. These contrasting effects give rise to an optimal tax scheme. Besides, transition matters. If the economy is better off in the long run, the required transitional saving effort increases the cost of the reform, thereby calling for a moderate magnitude of fiscal devaluation

Pricing-to-market and limited participation : a joint explanation to the exchange rate disconnect puzzle

Abstract Transition to floating exchange rates has led to sharp increases in nominal and real exchange rate volatilities with no corresponding changes in the distribution of macroeconomic fundamentals. This paper investigates the so-called exchange rate disconnect puzzle. In line with the New Open Economy Macroeconomics, Chari, Kehoe and MacGrattan [2000] quantitatively evaluate the role of the interaction between monetary shocks and pricing-to-market (PTM) in exchange rate fluctuations. Even if promising, their results depend on very specific assumptions which cast doubt on the relevance of their explanation. To circumvent this criticism, I investigate the specific channels through which monetary policy affects exchange rates given credit market friction. This paper thus highlights the combined role that PTM and limited participation to the credit market play in the explanation of the exchange rate disconnect puzzle, without relying on the Chari et al.'s specifications. I develop a two-country general equilibrium model based on PTM, credit market rigidities and monetary shocks. Given credit market friction and PTM, monetary shocks generate a nominal exchange rate overshooting which raises the nominal and real exchange rate volatility. The model built on limited participation and PTM improves our understanding of the huge observed exchange rate fluctuations

Divergence in Labor Market Institutions and International Business Cycles

 Ce papier examine la synchronisation internationale des PIB dans le cadre de modèles de cycles réels (Backus, Kehoe et Kydland, 1992). Il apporte un éclairage nouveau sur la question des co-mouvements en mettant en évidence le rôle des différences institutionnelles des marchés du travail. Nous documentons dans un premier temps le lien empirique entre l'hétérogénéité du marché du travail et les co-mouvements du PIB dans un échantillon de 15 pays de l'OCDE sur la période récente. L’hétérogénéité du marché du travail réduit significativement la corrélation entre les PIB. En outre, les effets ne sont pas triviaux, car ils dépendent des institutions du marché du travail. Nous étudions ensuite ce fait stylisé dans le modèle de cycles réels à deux pays avec des frictions du marché du travail à la Pissarides (1990), que l'on modifie afin de tenir compte des institutions hétérogènes. Le modèle rationalise le lien entre l'hétérogénéité du marché du travail et les co-mouvements du PIB observés dans les données. Nos résultats montrent que la prise en compte de l’hétérogénéité des institutions du marché du travail au sein des pays de l'OCDE améliore notre compréhension des cycles économiques et de leur co-mouvement.This paper investigates international GDP synchronization within the international real business cycle framework (Backus, Kehoe and Kydland, 1992). It sheds new light on the comovement issue by highlighting the role of cross-country divergence in labor market institutions (LMIs). We first document the empirical link between labor market heterogeneity and GDP comovement in a sample of 15 OECD countries over the recent period. Labor market heterogeneity significantly reduces cross-country GDP correlation. Besides, the effects are nontrivial, as they are found to depend on the design of LMIs. We then investigate this stylized fact within the two-country RBC model with labor-market frictions à la Pissarides, 1990, that we amend to take into account asymmetric LMIs. The model rationalizes the link between labor market heterogeneity and GDP comovement observed in the data. Our results show that taking into account the design of LMIs among OECD countries improves our understanding of their business cycle comovement

Pricing-to-market and limited participation : a joint explanation to the exchange rate disconnect puzzle

exchange rate disconnect puzzle, pricing-to-market, liquidity effect