Working Paper: CEPR ID: DP6015
Authors: Marta Aloi; Teresa Lloyd-Braga
Abstract: We analyze how global economic integration of factor markets affects the stability of the macroeconomy, with respect to expectations-driven fluctuations, when countries differ in their labor market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labor movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.
Keywords: fluctuations driven by self-fulfilling expectations; indeterminacy; international capital movements; international labour movements; unemployment
JEL Codes: E24; E32; F15; F20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liberalization of capital movements (F32) | persistent fluctuations at the world level (F01) |
| allowing for labor movements (J89) | macroeconomic stability (E60) |
| free migration (F22) | reduce unemployment (J68) |
| free migration (F22) | narrow wage differentials (J31) |
| average firm size in competitive country (L25) | downward pressure on wages in competitive country (F66) |
| downward pressure on wages in competitive country (F66) | increase unemployment in competitive country (F66) |
| increase unemployment in competitive country (F66) | decrease world output (F69) |