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Cyclical inflation divergence and different labor market institutions in the EMU

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  • Campolmi, Alessia
  • Faia, Ester

Abstract

This paper relates the size of the cyclical inflation differentials, currently observed for euro area countries, to the differences in labor market institutions across the same set of countries. It does that by using a DSGE model for a currency area with sticky prices and labor market frictions. We show that differences in labor market institutions account well for cyclical inflation differentials. The proposed mechanism is a supply side one in which differences in labor market institutions generate different dynamics in real wages and consequently in marginal costs and inflations. We test this mechanism in the data and find that the model replicates well the empirical facts. JEL Classification: E52, E24

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0619.

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Date of creation: May 2006
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Handle: RePEc:ecb:ecbwps:20060619

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Keywords: cyclical inflation divergence; EMU; labor market institutions;

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References

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Citations

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Cited by:
  1. Sebastian Dullien & Ulrich Fritsche, 2007. "Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-Run Divergence?: Results from a Comparison with the United States of America and Germany," Discussion Papers of DIW Berlin 674, DIW Berlin, German Institute for Economic Research.
  2. Raquel FONSECA & Lise PATUREAU & Thepthida SOPRASEUTH, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annales d'Economie et de Statistique, ENSAE, issue 95-96, pages 279-314.
  3. Christian Proaño Acosta, 2007. "Gradual Wage-Price Adjustments, Labour Market Frictions and Monetary Policy Rules," IMK Working Paper 09-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  4. Rumler, Fabio & Scharler, Johann, 2009. "Labor market institutions and macroeconomic volatility in a panel of OECD countries," Working Paper Series, European Central Bank 1005, European Central Bank.
  5. Brückner, Markus & Pappa, Evi, 2010. "Fiscal expansions affect unemployment, but they may increase it," CEPR Discussion Papers 7766, C.E.P.R. Discussion Papers.
  6. Ulrich Fritsche & Vladimir Kuzin, 2007. "Unit Labor Cost Growth Differentials in the Euro Area, Germany, and the US: Lessons from PANIC and Cluster Analysis," Discussion Papers of DIW Berlin 667, DIW Berlin, German Institute for Economic Research.
  7. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
  8. Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2010. "Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 865-881, November.
  9. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008.
  10. Sebastian Dullien & Ulrich Fritsche, 2008. "Does the dispersion of unit labor cost dynamics in the EMU imply long-run divergence?," International Economics and Economic Policy, Springer, vol. 5(3), pages 269-295, November.
  11. Mirko Abbritti, 2007. "A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 09-2007, Economics Section, The Graduate Institute of International Studies.
  12. Patureau, Lise, 2012. "Labor market frictions and the international propagation mechanism," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(1), pages 199-222.
  13. Lieb Lenard, 2009. "Taking Real Rigidities Seriously: Implications for Optimal Policy Design in a Currency Union," Research Memorandum 032, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  14. Vitale, Paolo, 2006. "A market microstructure analysis of foreign exchange intervention," Working Paper Series, European Central Bank 0629, European Central Bank.
  15. Ulrich Fritsche & Vladimir Kuzin, 2011. "Analysing convergence in Europe using the non-linear single factor model," Empirical Economics, Springer, Springer, vol. 41(2), pages 343-369, October.

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