Seminar in Makroökonomik Detail

Speaker:
Brigitte Hochmuth (University of Vienna)

Labor Market Reforms in Open Economies: Consumer Heterogeneity and Current Account Dynamics
 

Abstract: This paper establishes a link between labor market reforms and an increase in the reforming country’s net foreign asset position via a precautionary savings channel. Using a heterogeneous agent model of a small open economy with labor market frictions, we evaluate the current account effects of a major German unemployment benefit reform. We show that accounting for precautionary savings is qualitatively and quantitatively important for current account dynamics. Furthermore, welfare gains and losses are distributed unequally among agents. Compared to a closed economy, the reform is more detrimental in the short run and more beneficial in the long run.

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