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Labour Market Asymmetries in a Monetary Union

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  • Andersen, Torben M
  • Seneca, Martin
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    Abstract

    This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6800.

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    Date of creation: Apr 2008
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    Handle: RePEc:cpr:ceprdp:6800

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    Related research

    Keywords: business cycles; monetary policy; monetary union; nominal wage rigidity; shocks; staggered contracts; wage formation;

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    Cited by:
    1. Herbert S. Buscher & Hubert Gabrisch, 2009. "Is the European Monetary Union an Endogenous Currency Area? The Example of the Labor Markets," IWH Discussion Papers 7, Halle Institute for Economic Research.

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