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<p>External (im)balances are key to the evolution of financial crises and international disputes, yet the role of exchange rate regimes in shaping trade and current account balance remains contested. We contend that this relationship depends on the institutional environment: exchange rate rigidity fosters trade and current account surpluses under flexible labor market institutions but leads to deficits under rigid labor markets. The argument is supported by empirical analysis of a global time-series cross-sectional sample that includes both advanced economies and developing countries. The findings are robust across diverse modeling approaches and alternative measures of labor market flexibility.</p>

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The Political Economy of Exchange Rate Regimes and External (Im)Balances: The Role of Labor Market Institutions

  • 期刊论文

  • 发表日期：

    2025年5月2日

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  • Vytautas Kuokštis,
  • Simonas Algirdas Spurga

摘要

External (im)balances are key to the evolution of financial crises and international disputes, yet the role of exchange rate regimes in shaping trade and current account balance remains contested. We contend that this relationship depends on the institutional environment: exchange rate rigidity fosters trade and current account surpluses under flexible labor market institutions but leads to deficits under rigid labor markets. The argument is supported by empirical analysis of a global time-series cross-sectional sample that includes both advanced economies and developing countries. The findings are robust across diverse modeling approaches and alternative measures of labor market flexibility.