Unemployment differentials are greater between countries in the euro area than between U.S. states. In both regions, net migration responds to unemployment differentials, though the response is smaller in the euro area compared to the U.S. We use a multi-country DSGE model with cross-border migration to quantify Mundell's hypothesis that labour mobility could substitute for independent monetary policy in a currency union. While not as effective as independent monetary policy, increased labour mobility reduces business cycle fluctuations for most countries in the euro area. However, Mundell's conjecture does not hold uniformly. For countries that primarily face demand shocks, labour mobility stabilizes inflation and unemployment and improves welfare. If supply shocks are dominant however, labour mobility increases the cost of being in a currency union by magnifying inflation volatility.

We examine the responsiveness of labor participation, unemployment, and labor migration to exogenous variations in labor demand. Our empirical approach considers four instruments for regional labor demand commonly used in the literature. Empirically, we find that labor migration is a significant margin of adjustment for all our instruments. Following an increase in regional labor demand, the initial increase in employment is accounted for mainly by a reduction in unemployment. Over time however, net labor in-migration becomes the dominant factor contributing to increased regional employment. After five years, roughly 60 percent of the increase in employment is explained by the change in population. Responses of labor migration are strongest for individuals age 20-35. Based on historical data back to the 1950s, we find no evidence of a decline in the elasticity of migration to changes in employment.

We estimate the responsiveness of net labor migration to regional differences in unemployment rates across the United States since the mid-1970s. Our baseline estimate suggests an elasticity of roughly -0.3. For typical labor force participation ratios, an increase of 100 unemployed workers in an area is associated with net out-migration of roughly 47 workers. Instrumenting for regional unemployment produces even higher estimates. Our estimates are stable over time, inclusive of the Great Recession. The estimates depend crucially on accurate data and accounting for long-term trends in migration and unemployment.

The hoped-for silver lining of euro-area austerity programs was to raise external competitiveness and improve current accounts. Using product- and industry-level data for 12 countries over the period 1999–2018, we show that reductions in government spending reduce prices and wages but only for products with low import content and industries with low export shares. This leads to asymmetric expenditure switching, with net exports improving through lower imports rather than higher exports. The standard small-open-economy model fails to rationalize these findings, but home bias in government spending and frictions preventing factor prices from equalizing across sectors considerably improve the fit of the model. (JEL E31, E62, F14, F33, F45, H20, H50)

When workers are sluggish to change sectors and government demand is concentrated on few sectors, an increase in government spending has limited impact on production in other sectors and multipliers are higher. Compared to a one-sector model, a model calibrated to the 404 sectors of the U.S. economy raises multipliers by 0.5 when preferences feature no wealth effects on labor supply and by more if wealth effects are present. Relative price movements observed in response to spending shocks are consistent with the model's mechanism. The model suggests that multipliers depend on the composition of stimulus packages. (C) 2022 Elsevier B.V. All rights reserved.

How do financial frictions shape the set of acquirers, how much they acquire, and how long they keep ownership? To address these questions, we develop a tractable model of M&As whereby acquirers and targets emerge endogenously due to differences in liquidity. Financial crises lead to selection effects among acquirers that result in larger acquired stakes and more persistent ownership. We present evidence consistent with the predictions of the model in a dataset of domestic and cross-border M&As from emerging markets. Financially constrained domestic firms in crisis-hit countries acquire 11-15% more ownership. The survival rate of these acquisitions is 19-24% higher.

We examine austerity in advanced economies since the Great Recession.Austerity shocks are reductions in government purchases that exceed reduced-form forecasts.Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports.We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data.Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe.Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.

We exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade-weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment, and higher state hours worked. The effects are particularly strong during periods of economic slack. A multiregion model with interstate trade and labor flows, calibrated to match state-level trade data and migration flows, replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

This paper studies the effects of fiscal policy on inflation and prices. Using data for twelve euro area countries over 1996Q1 to 2017Q3, it shows that: (a) reductions in government spending are deflationary; this effect is significant on consumption goods with low-import shares (non-traded), but muted for high-import share categories; (b) the pass-through of consumption tax changes to retail prices is strongly increasing in a consumption category’s import share; (c) raising consumption tax rates on high-importshare goods causes a stronger increase in aggregate prices and a change in relative prices. In a second step, we rationalize these findings in a multi-product, multi-country DSGE models calibrated to match observed product-specific bilateral trade linkages. We show that traded intermediate goods are fundamental in explaining the asymmetric effects of fiscal policy on inflation. JEL code: E62, F41, F45 ∗Lambertini: Luisa.Lambertini@epfl.ch; Proebsting: Christian.Probsting@epfl.ch †École Polytechnique Fédérale de Lausanne ‡École Polytechnique Fédérale de Lausanne

We empirically show that the austerity packages implemented in some euro area countries during 2010–2014 were only partially successful in generating internal devaluations. Countries that cut spending indeed experienced a decline in nominal wages, a real exchange rate depreciation, a fall in the relative price of non-tradables and a shift of consumption toward non-tradables, whereas we find no such evidence for countries raising consumption taxes. We show that this asymmetric response is in line with a small open economy model with GHH preferences. Moreover, the output costs of correcting current accounts were higher than anticipated because neither policy was successful in raising exports through lower prices. Instead, current account improvements were solely driven by lower imports stemming from faltering domestic demand. We provide evidence that exporters absorbed lower wages through higher markups, and show in a model with pricing to market that, had firms kept their markups constant, output costs of correcting current account imbalances would have been cut by almost one half.

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.

Cyclical unemployment rates differ substantially more between countries in the euro area than between states in the United States. We find that net migration is responsive to unemployment differentials, but the response is smaller in Europe relative to the U.S. This paper explores to what extent the lack of labor mobility in Europe makes it more difficult for the euro area to adjust to shocks. We develop a multi-country DSGE model of a currency union with cross-border migration and search frictions in the labor market. The model is calibrated to the 50-state U.S. economy and to the 31-country European economy and replicates, for each region, the relationship between net migration and unemployment differentials. The model allows us to quantify the benefits if Europe had enjoyed levels of labor mobility as high as those in the U.S. during the most recent crisis.

How does inflation respond to fiscal policy? This paper empirically shows in a sample of 30 European countries over 1996 2017 that reductions in government spending are deflationary, whereas increases in consumption taxes are inflationary. The first effect is weaker for consumption categories with large import shares. Contractionary fiscal policy in a country’s trading partners, however, has no impact on domestic inflation. In a second step, we rationalize this asymmetric finding in a multi-product, multi-country DSGE models calibrated to match observed product-specific bilateral trade linkages. We show that pricing-to-market strategies can account for the asymmetric effects of fiscal policy on inflation. ∗Lambertini: luisa.lambertini@epfl.ch; Proebsting: Christian.Probsting@epfl.ch †École Polytechnique Fédérale de Lausanne ‡École Polytechnique Fédérale de Lausanne

How do Vnancial frictions shape the set of acquirers, how much they acquire, and how long they keep ownership? To address these questions, we develop a tractable model of M&As whereby acquirers and targets emerge endogenously due to diUerences in liquidity. Financial crises lead to selection eUects among acquirers that result in larger acquired stakes and more persistent ownership. We present evidence consistent with the predictions of the model in a dataset of domestic and cross-border M&As from emerging markets. Financially constrained domestic Vrms in crisis-hit countries acquire 11-15% more ownership. The survival rate of these acquisitions is 19-24% higher.