Working Paper: CEPR ID: DP8838
Authors: Jiandong Ju; Kang Shi; Shangjin Wei
Abstract: Sticky (or slow-adjusting) current accounts are observed for many countries. This paper explores the role of domestic factor market flexibility in understanding the phenomenon. To do so, we consider multiple tradable sectors with different factor intensities and allow substitution between intertemporal trade (current account adjustment) and intra-temporal trade (goods trade) in a dynamic general equilibrium model. An economy?s response to a shock generally involves a combination of a change in the composition of goods trade and a change in the current account. Flexible factor markets reduce the need for the current account to adjust. On the other hand, the more rigid the factor markets, the larger the size of current account adjustment relative to the volume of goods trade, and the slower the speed of adjustment of the current account towards its long-run equilibrium. We present empirical evidence in support of the theory.
Keywords: current account; intertemporal trade; labor market rigidity; trade balance
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexible factor markets (F16) | need for current account adjustments (F32) |
| increased labor market rigidity (J48) | size of current account adjustments relative to goods trade (F32) |
| rigid labor markets (J48) | utilization of current account adjustments in response to shocks (F32) |
| labor market rigidity (J48) | speed of current account adjustment (F32) |
| more rigid labor market (J29) | variability in current account relative to total trade volume (F32) |