NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Quantifying the Benefits of Labor Mobility in a Currency Union

Christopher L. House, Christian Proebsting, Linda L. Tesar

NBER Working Paper No. 25347
Issued in December 2018
NBER Program(s):The Economic Fluctuations and Growth Program, The International Finance and Macroeconomics Program, The Monetary Economics Program

Unemployment differentials are bigger in Europe than in the United States. Migration responds to unemployment differentials, though the response is smaller in Europe. Mundell (1961) argued that factor mobility is a precondition for a successful currency union. We use a multi-country DSGE model with cross-border migration and search frictions to quantify the benefits of increased labor mobility in Europe and compare this outcome to a case of fully flexible exchange rates. Labor mobility and flexible exchange rates both work to reduce unemployment and per capita GDP differentials across countries provided that monetary policy is sufficiently responsive to national output.

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Document Object Identifier (DOI): 10.3386/w25347

 
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