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Labour Market Reform and Monetary Policy in EMU: Do Asymmetries Matter?

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  • Hughes Hallett, Andrew
  • Viegi, Nicola

Abstract

This Paper analyses the interaction between a common monetary policy and differentiated labour market institutions. We develop a model of a two country monetary union. In each country, labour market institutions are distinguished by the degree of centralization in wage bargaining. In each country the government can also use an instrument (general taxation or payroll taxes) to influence their overall labour costs. Finally a common monetary policy is followed in a ‘conservative’ manner, as defined by Rogoff (1985). The results show that structural and preference asymmetries matter, both in the determination of economic policy and in performance. In particular centralized labour market institutions confer a certain comparative advantage in policy making which provides a natural incentive for the less flexible (or less reformed) to want to join a currency union; and for the more flexible to stay outside. This lowers the incentives for reform inside the union, as Calmfors and others have conjectured.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2979.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2979

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Related research

Keywords: asymmetries; labour market institutions; monetary union;

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References

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Citations

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Cited by:
  1. Moïse Sidiropoulos & Eleftherios Spyromitros, 2006. "Fiscal Policy in a Monetary Union Under Alternative Labour-Market Structures," Working Papers of BETA 2006-25, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Andrew Hughes Hallett & Svend E Hougaard Jensen & Christian Richter, 2004. "Northern and Eastern Enlargement of EMU: Do Structural Reforms Matter?," SUERF Studies, SUERF - The European Money and Finance Forum, number 2004/3 edited by Morten Balling, April.
  3. Bokan, Nikola & Hughes Hallett, Andrew, 2006. "Labour and Product Market Reforms in the Economy with Distortionary Taxation," CEPR Discussion Papers 5431, C.E.P.R. Discussion Papers.
  4. Sotiris Theodoropoulos, 2005. "Asymmetric Shocks, Structural Rigidities and Adjustment Capability in EMU - A Review," European Research Studies Journal, European Research Studies Journal, vol. 0(3-4), pages 3-20.

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