Abstract We build a multi-country model with intermediate-input trade and frictional labor markets and estimate it using a global vector autoregression for the EU-15. The framework traces how reforms propagate through input-output linkages and “import-back” feedbacks and shows that theory-based long-run restrictions and transmission weights materially affect inference. Domestic (single-country) shocks have modest, often insignificant effects. By contrast, coordinated policy changes matter: joint employment-protection reforms durably raise employment and GDP, with some increase in long interest rates. These results are robust under trade- and theory-based propagation and remain when policy variables are treated as predetermined.
Lastauskas et al. (Fri,) studied this question.