International Economics and Economic Policy

, Volume 7, Issue 4, pp 391–409 | Cite as

Capital mobility and labor market volatility

Original Paper


We used a dynamic two-country optimizing model featuring efficiency wages to analyze the implications of capital mobility for labor market volatility. Capital mobility magnifies the short-run effects of productivity shocks and monetary shocks on employment and the real wage, but dampens the medium-run effects. The overall effects of capital mobility on the volatility and the cyclical properties of employment and the real wage are moderate.


Capital mobility Efficiency wages Labor market volatility 

JEL Classification

E44 F36 F41 



We thank two anonymous referees for their very helpful comments. The usual disclaimer applies.


  1. Akerlof GA (1982) Labor contracts as partial gift exchange. Q J Econ 97:543–569CrossRefGoogle Scholar
  2. Alexopoulos M (2004) Unemployment and the business cycle. J Monet Econ 51:277–298CrossRefGoogle Scholar
  3. Aziarides C, Pissarides CA (2007) Unemployment dynamics with international capital mobility. Eur Econ Rev 51:27–48CrossRefGoogle Scholar
  4. Backus DK, Kehoe PJ, Kydland FE (1992) International real business cycles. J Polit Econ 100:745–775CrossRefGoogle Scholar
  5. Bergin PR (2006) How well can the new open economy macroeconomics explain the exchange rate and current account? J Int Money Financ 25:675–701CrossRefGoogle Scholar
  6. Betts C, Devereux MB (2000) Exchange rate dynamics in a model of pricing-to-market. J Int Econ 50:215–244CrossRefGoogle Scholar
  7. Betts C, Devereux MB (2001) The international effects of monetary and fiscal policy in a two-country model. In: Calvo GA, Dornbusch R, Obstfeld M (eds) Money, capital mobility, and trade: essays in honor of Robert A. Mundell. MIT, Cambridge, pp 9–52Google Scholar
  8. Bewley TF (1998) Why not cut pay? Eur Econ Rev 42:459–490CrossRefGoogle Scholar
  9. Buch CM, Döpke J, Pierdzioch C (2005) Financial openness and business cycle volatility. J Int Money Financ 24:744–765CrossRefGoogle Scholar
  10. Buch CM, Pierdzioch C (2005) The integration of imperfect financial markets: implications for business cycle volatility. J Policy Model 27:789–804CrossRefGoogle Scholar
  11. Buch CM, Pierdzioch C (2009) Low skills but high volatility? CESifo Working Paper 2665Google Scholar
  12. Calvo G (1983) Staggered prices in a utility-maximizing framework. J Monet Econ 12:383–398CrossRefGoogle Scholar
  13. Carlino G, DeFina R, Sill K (2003) Postwar period changes in employment volatility: new evidence from state/industry panel data. Federal Reserve Bank of Philadelphia Working Paper 03-18Google Scholar
  14. Chari VV, Kehoe PJ, McGrattan ER (2002) Can sticky price models generate volatile and persistent real exchange rates? Rev Econ Stud 69:533–563CrossRefGoogle Scholar
  15. Cole HL, Obstfeld M (1991) Commodity trade and international risk sharing: how much do financial markets matter? J Monet Econ 28:3–24CrossRefGoogle Scholar
  16. Collard F, de la Croix D (2000) Gift exchange and the business cycle: the fair wage strikes back. Rev Econ Dyn 3:166–193CrossRefGoogle Scholar
  17. Danthine JP, Donaldson JB (1990) Efficiency wages and the business cycle puzzle. Eur Econ Rev 34:1275–1301CrossRefGoogle Scholar
  18. Danthine JP, Kurmann A (2004) Fair wages in a new Keynesian model of the business cycle. Rev Econ Dyn 7:107–142CrossRefGoogle Scholar
  19. Fuhrer J (2000) Habit formation in consumption and its implications for monetary-policy models. Am Econ Rev 90:367–390CrossRefGoogle Scholar
  20. Hairault JO (2002) Labor-market search and international business cycles. Rev Econ Dyn 5:535–558CrossRefGoogle Scholar
  21. Hairault JO, Portier F (1993) Money, new-Keynesian macroeconomics, and the business cycle. Eur Econ Rev 37:1533–1568CrossRefGoogle Scholar
  22. Heathcote J, Perri F (2002) Financial autarky and international business cycles. J Monet Econ 49:601–627CrossRefGoogle Scholar
  23. Kehoe PJ, Perri F (2002) International business cycles with endogenous incomplete markets. Econometrica 70:907–928CrossRefGoogle Scholar
  24. Klein P (2000) Using the generalized Schur form to solve a multivariate linear rational expectations model. J Econ Dyn Control 24:1405–1423CrossRefGoogle Scholar
  25. Kollmann R (2001) Explaining international comovements of output and asset returns: the role of money and nominal rigidities. J Econ Dyn Control 25:1547–1583CrossRefGoogle Scholar
  26. Kose MA, Prasad ES, Terrones ME (2003) Financial integration and macroeconomic volatility. IMF Staff Pap 50:119–142Google Scholar
  27. Krusell P, Smith AA Jr (1999) On the welfare effects of eliminating business cycles. Rev Econ Dyn 2:245–272CrossRefGoogle Scholar
  28. Ljungqvist L, Uhlig H (2000) Tax policy and aggregate demand management under catching up with the Joneses. Am Econ Rev 90:356–366CrossRefGoogle Scholar
  29. McCallum B (1998) Solutions to linear rational expectations models: a compact exposition. Econ Lett 61:143–147CrossRefGoogle Scholar
  30. McCallum B (2001) Software for RE analysis. Computer software available at: Accessed 20 Jan 2010
  31. Mukoyama T, Sahin A (2006) Costs of business cycles for unskilled workers. J Monet Econ 53:2179–2193CrossRefGoogle Scholar
  32. Obstfeld M, Rogoff K (1995) Exchange rate dynamics redux. J Polit Econ 103:624–660CrossRefGoogle Scholar
  33. Razin A, Rose AK (1994) Business-cycle volatility and openness: an exploratory cross-sectional analysis. In: Leiderman L, Razin A (eds.) Capital mobility: the impact on consumption, investment, and growth. Cambridge University Press, Cambridge, pp 48–75Google Scholar
  34. Scheve K, Slaughter MJ (2004) Economic insecurity and the globalization of production. Am J Polit Sci 48:662–674CrossRefGoogle Scholar
  35. Schmitt-Grohé S, Uribe M (2003) Closing small open economy models. J Int Econ 61:163–185CrossRefGoogle Scholar
  36. Senay Ö (1998) The effects of goods and financial market integration on macroeconomic volatility. Manch Sch Suppl 66:39–61CrossRefGoogle Scholar
  37. Smets F, Wouters R (2005) Comparing shocks and frictions in the US and Euro area business cycles: a Bayesian DSGE approach. J Appl Econ 20:161–183CrossRefGoogle Scholar
  38. Solow RM (1979) Another possible source of wage stickiness. J Macroecon 1:79–82CrossRefGoogle Scholar
  39. Stock JH, Watson MW (2002) Has the business cycle changed and why? NBER Macroeconomics Annual 2002, pp 159–218Google Scholar
  40. Sutherland A (1996) Financial market integration and macroeconomic volatility. Scand J Econ 98:521–539CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.FEP, CEF.UPUniversity of PortoPortoPortugal
  2. 2.Department of EconomicsSaarland UniversitySaarbrueckenGermany

Personalised recommendations