Labor Mobility and Exchange Rate Regime in Open Economies

2021-05-19 14:00:00

In this paper, we study the impact of labor mobility on the choice of exchange rate regime in an open economy New Keynesian model. We find that the relationship between labor mobility and exchange rate flexibility depends on the source of asymmetric regional shocks. With demand shocks, labor mobility substitutes for flexible exchange rates regime since it helps reflecting worker preferences toward locational stability. With supply shocks, flexible exchange rates help to fully realize the efficiencies of moving workers to higher productivity regions. Thus, areas with high inter-regional labor mobility may benefit most from exchange rate flexibility.

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