Template-Type: ReDIF-Paper 1.0
Title: Quantifying the Germany Shock: Structural Reforms and Spillovers in a Currency Union
Author-Name: Harald Fadinger
Author-Email: harald.fadinger@uni-mannheim.de
Author-Name: Philipp Herkenhoff
Author-Email: philipp.herkenhoff@gmail.com
Author-Name: Jan Schymik
Author-Email: jan.schymik@uni-mannheim.de
Classification-JEL: F16, F41, F45
Keywords: Euro, monetary union, nominal rigidities, labor markets, structural reforms, import competition,
spillovers, quantitative trade model

Abstract: We examine the effects of unilateral structural reforms within a currency union. Focusing on the 
surge of German competitiveness following the introduction of the Euro, we first
provide reduced-form causal evidence supporting the notion that German structural labor market 
reforms in the early 2000s led to a crowding-out of manufacturing employment in
other Eurozone economies. To assess the impact of this German competitiveness shock, we
build a quantitative multi-sector trade model that features downward nominal wage rigidities, 
endogenous labor supply, unemployment-insurance benefits and international savings.
The fixed nominal exchange rate can create binding nominal rigidities in response to a foreign
real supply shock – like the one prompted by the German reforms – resulting in significant
contraction of manufacturing sectors and increased involuntary unemployment across other
Eurozone countries. We consider a number of counterfactual scenarios, such as the impact
of German labor-market reforms in the absence of a fixed exchange-rate regime, the role of
coordinated reforms within the Eurozone and a higher average inflation rate.
of view.


Note: 
Length: 49
Creation-Date: 2023-06
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp435
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_435