Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies

32 Pages Posted: 26 May 2021

See all articles by Romain Duval

Romain Duval

International Monetary Fund (IMF)

Davide Furceri

International Monetary Fund (IMF)

João Tovar Jalles

University of Lisbon; International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Date Written: February 1, 2021

Abstract

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

JEL Classification: C33, E62, H63, J08, O43, F32, J41, G10

Suggested Citation

Duval, Romain and Furceri, Davide and Jalles, João Tovar, Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies (February 1, 2021). IMF Working Paper No. 2021/054, Available at SSRN: https://ssrn.com/abstract=3852783

Romain Duval (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Davide Furceri

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

João Tovar Jalles

University of Lisbon ( email )

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

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