DP2531 What We Cannot Learn from the Irish Experience: A Fundamental Asymmetry of Asymmetric Shocks

Author(s):	Fredrik Andersson, Rikard Forslid
Publication Date:	August 2000
Keyword(s):	Asymmetric Shocks, Migration
JEL(s):	E24, F16, F22
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2531

A simple N-country specific-factor type model with imperfectly mobile labour is developed. It is shown that the effects of country-specific productivity shocks hitting a small country are fundamentally asymmetric. A positive shock will be accommodated by a moderate wage increase and sizeable in-migration, whereas a negative shock will be accommodated by a significant decrease in wages and moderate out-migration. The effects of shocks in a monetary union are discussed, and it is argued that the results are consistent with the recent Irish experience. The welfare effects of small economic fluctuations are also discussed.