Working Paper: NBER ID: w13388
Authors: Jiandong Ju; Shangjin Wei
Abstract: This paper aims to provide a theory of current account adjustment that generalizes the textbook version of the intertemporal approach to current account and places domestic labor market institutions at the center stage. In general, in response to a shock, an economy adjusts through a combination of a change in the composition of goods trade (i.e., intra-temporal trade channel) and a change in the current account (i.e., intertemporal trade channel). The more rigid the labor market, the slower the speed of adjustment of the current account towards its long-run equilibrium. Three pieces of evidence are provided that are consistent with the theory.
Keywords: current account; labor market rigidity; trade adjustment; intertemporal approach
JEL Codes: E00; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market rigidity (J48) | Current account adjustment speed (F32) |
| Labor market rigidity (J48) | Speed of adjustment of current account towards long-run equilibrium (F32) |
| Current account adjustment speed (F32) | Current account response to shocks (F32) |
| Shock to capital stock (E22) | Current account (F32) |
| Labor market rigidity (J48) | Variance of current account (F32) |