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Asymmetric Labour Markets in a Converging Europe: Do Differences Matter?


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    Asymmetric economic structures across Europe may result in common shocks having asymmetric effects. In this paper we investigate whether the differences in the structure and dynamics that we observe in the European economies matter for policy design. In particular it is widely believed that labour market responses are different, with the structure of labour demand and the nature of the bargain over wages differing between countries. In addition the European economies move at different speeds in response to common shocks. In this paper we construct three different models of Europe, one where the labour market relationships are separately estimated and assumed to be different, one where the most statistically acceptable commonalties are imposed and one where common labour market relationships are imposed across all member countries. We use panel estimation techniques to test for the imposition of commonalties among countries. We find that it is possible to divide Europe into sub-groups, but it is not possible to have one model of European labour markets. We use stochastic simulation techniques on these different models of Europe and find that the preferred rule for the ECB is a combined nominal aggregate and inflation-targeting rule. We find that while this rule is dominant in all our models, the more inertia that is introduced into the labour markets, the more a nominal aggregate-targeting rule alone may be preferred. However, we conclude, that differences in the labour market transmission mechanisms across the European countries appear to have little influence on the setting of monetary policy for the ECB, although this depends on the relative importance of the different components in the welfare loss function.

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    Bibliographic Info

    Paper provided by European Network of Economic Policy Research Institutes in its series Economics Working Papers with number 002.

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    Length: 44 pages
    Date of creation: Jan 2001
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    Handle: RePEc:epr:enepwp:002

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    Keywords: Labour markets; Asymmetries; Monetary policy rules; feedback rules; stochastic simulations; Macro-economic stabilisation.;

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    Cited by:
    1. Albert van der Horst, 2003. "Structural Estimates of Equilibrium Unemployment in Six OECD Economies," Economics Working Papers 022, European Network of Economic Policy Research Institutes.
    2. Manh Ha Duong & Camille Logeay & Sabine Stephan & Rudolf Zwiener & Serhiy Yahnych, 2005. "Modelling European Business Cycles (EBC Model): A Macroeconometric Model of Germany ; Version March 2005," Data Documentation 5, DIW Berlin, German Institute for Economic Research.
    3. John FitzGerald, 2001. "Wage Determination in Economies in Transition: Ireland Spain and Portugal," Papers WP141, Economic and Social Research Institute (ESRI).
    4. Susanne Lütz & Matthias Kranke, 2010. "Beyond the crisis: EMU and labour market reform pressures in good and bad times," LSE Research Online Documents on Economics 53300, London School of Economics and Political Science, LSE Library.
    5. Peeters, Marga & Den Reijer, Ard, 2011. "On wage formation, wage flexibility and wage coordination : A focus on the wage impact of productivity in Germany, Greece, Ireland, Portugal, Spain and the United States," MPRA Paper 31102, University Library of Munich, Germany.


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