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National labor markets, international factor mobility and macroeconomic instability

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We consider a standard two-country environment, where one of the two countries has a rigid labor market, and analyze how global economic integration affects the economies with respect to expectations-driven cycles and steady state welfare. We show that by allowing free capital mobility, equilibrium indeterminacy is exported from the rigid wage country to the world economy. If further liberalization is permitted, by allowing free movements of labor, the scope for indeterminacy is reduced and open labor markets may produce a stabilizing effect on the global macro-economy. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries, which determines the direction of migration flows.

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Correspondence to Marta Aloi.

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We thank an anonymous referee for insightful comments. This paper has also benefited from comments and suggestions by Spiros Bougheas, Carl Davidson, Richard Disney and Doug Nelson. Marta Aloi gratefully acknowledges the financial support of the British Academy. Teresa Lloyd-Braga gratefully acknowledges the financial support of UNICEE, Universidade Católica Portuguesa: FCEE, and the hospitality of the GEP Centre at Nottingham University.

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Aloi, M., Lloyd-Braga, T. National labor markets, international factor mobility and macroeconomic instability. Econ Theory 43, 431–456 (2010).

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