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Floating Exchange Rates as Employment Protection

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  • Yu-Fu Chen
  • Gylfi Zoega

Abstract

Floating exchange rates allow central banks to respond to aggregate demand fluctuations by changing their interest rates. However, such fluctuations create inertia in the labour market by increasing the cost of hiring and firing workers. A regime of flexible exchange rates can cause rigidities in labour markets similar to those caused by legalised firing restrictions. Exchange rate volatility makes firms wait before hiring new workers and firing existing ones. Thus the adoption of a common currency has effects very similar to the removal of employment-protection legislation and other direct restrictions on hiring and firing. Exchange-rate volatility is more harmful for the entry of new firms than employment-protection legislation, particularly promising, high-risk ventures.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c016_038.

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Length: 18 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:deg:conpap:c016_038

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Keywords: Floating Exchange Rates; Labour-market Flexibility;

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  1. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
  2. Chen, Yu-Fu & Snower, Dennis J. & Zoega, Gylfi, 2002. "Labour Market Institutions and Macroeconomic Shocks," CEPR Discussion Papers 3480, C.E.P.R. Discussion Papers.
  3. Elżbieta Bednarek-Sekunda & Richard Jong-A-Pin & Jakob de Haan, 2010. "The European Economic and Monetary Union and Labour Market Reform," European Union Politics, , vol. 11(1), pages 3-27, March.
  4. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2007. "Reforms, Exchange Rates and Monetary Commitment: A Panel Analysis for OECD Countries," Open Economies Review, Springer, vol. 18(3), pages 369-388, July.
  5. Yu-Fu Chen & Gylfi Zoega, . "On The Effectiveness Of Firing Costs," Dundee Discussion Papers in Economics 087, Economic Studies, University of Dundee.
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