Rebalancing the Euro Area: Is Wage Adjustment in Germany the Answer?

Hoffmann, Mathias; Kliem, Martin; Krause, Michael U.; Moyen, Stephane; Šauer, Radek

doi:10.2139/ssrn.3581203

Download This Paper

Open PDF in Browser

Add Paper to My Library

Rebalancing the Euro Area: Is Wage Adjustment in Germany the Answer?

Deutsche Bundesbank Discussion Paper No. 17/2020

58 Pages Posted: 21 Apr 2020

See all articles by Mathias Hoffmann

We assess to what extent wage inflation policies in Germany could contribute to an economic rebalancing in the euro area and the rest of the world. We find that a rise in nominal wage inflation has positive short-run effects on inflation and output in Germany and the rest of the euro area. The duration of constant interest rates and expectations about the monetary policy stance matter to the magnitude of the results obtained. We establish that the modelling of the trade relationships with the rest of the world is of particular importance, as it allows to capture the induced relative price movements and hence changes in competitiveness within the three regions. Our results are obtained from an estimated DSGE model which consists of Germany, the rest of the euro area, and the rest of the world.

Keywords: DSGE model, Bayesian estimation, Monetary policy, Trade balance

Suggested Citation: Suggested Citation

Hoffmann, Mathias and Kliem, Martin and Krause, Michael U. and Moyen, Stephane and Šauer, Radek, Rebalancing the Euro Area: Is Wage Adjustment in Germany the Answer? (2020). Deutsche Bundesbank Discussion Paper No. 17/2020, Available at SSRN: https://ssrn.com/abstract=3581203 or http://dx.doi.org/10.2139/ssrn.3581203