Fixed exchange rate - a friend or foe of labor cost adjustments?

  • The authors examine the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. They develop a medium-scale three-region DSGE model and show that the impact of a cut in the employers’ social security contributions rate does not vary significantly under different exchange rate regimes. They find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability. Finally, they assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers’ social security contributions rates have statistically significant real effects – a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Author:Lazar MilivojevicGND, Balint Tatar
Parent Title (English):Working paper series / Institute for Monetary and Financial Stability ; 152
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (152)
Publisher:Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2021
Year of first Publication:2021
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2021/02/16
Tag:DSGE; Exchange rate regime; Labor cost adjustments; Local projection; Structural policies
Page Number:61
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C5 Econometric Modeling / C53 Forecasting and Other Model Applications
Licence (German):License LogoDeutsches Urheberrecht