The Shocks Matter: Labor Mobility and the Welfare Cost of a Currency Union

42 Pages Posted: 22 Aug 2022 Last revised: 16 Sep 2022

See all articles by Sihao Chen

Sihao Chen

Hong Kong Baptist University

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Haichao Fan

Fudan University - School of Economics

Juanyi (Jenny) Xu

Hong Kong University of Science & Technology (HKUST); Simon Fraser University (SFU); Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: September 07, 2024

Abstract

In this paper, we study the impact of labor mobility on the welfare cost of currency union in an open economy New Keynesian model. We find that the relationship between labor mobility and exchange rate flexibility depends on the source of asymmetric regional shocks. With demand shocks, labor mobility substitutes for flexible exchange rates regime since it will minimize the costs of asymmetric demand levels across regions. With supply shocks, flexible exchange rates can work in conjunction with highly mobile labor to reallocate the factors of production to higher productivity regions of potential currency areas. Thus, exchange rate flexibility and labor mobility can be complements instead of substitutes and areas with high inter-regional labor mobility may benefit most from exchange rate flexibility.

Keywords: Labor Mobility, Welfare, Exchange Rate Regime

JEL Classification: F3, F4

Suggested Citation

Chen, Sihao and Cook, David E. and Fan, Haichao and Xu, Juanyi (Jenny), The Shocks Matter: Labor Mobility and the Welfare Cost of a Currency Union (September 07, 2024). HKUST Business School Research Paper No. 2022-076, Available at SSRN: https://ssrn.com/abstract=4190391 or http://dx.doi.org/10.2139/ssrn.4190391

Sihao Chen (Contact Author)

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

Haichao Fan

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Juanyi (Jenny) Xu

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Simon Fraser University (SFU)

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

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