Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications

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Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications

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Mirko Abbritti () (Universidad de Navarra and The Graduate Institute, Geneva)
Andreas Mueller () (Institute for International Economic Studies, Stockholm)

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Abstract

How do asymmetric labor market institutions affect the volatility of inflation and unemployment differentials in a currency union? What are the implications for monetary policy? To answer these questions, this paper sets up a DSGE currency union model with unemployment, hiring frictions and real wage rigidities. The model provides a rigorous but tractable framework for the analysis of the functioning of a currency union characterized by asymmetric labor market institutions. Positively, we find that inflation and unemployment differentials strongly depend on the underlying labor market structures. Moreover, asymmetries in labor market structures increase the volatility of both inflation and unemployment differentials. Normatively, we find that the optimal inflation target should give a higher weight to regions with more sclerotic labor markets but with more flexible real wages.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number 02-2009.

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Length: 39
Date of creation: Dec 2007
Date of revision: Apr 2009
Handle: RePEc:gii:giihei:heiwp02-2009

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Paper
- Mirko Abbritti & Andreas Mueller, 2007. "Asymmetric Labor Market Institutions in the EMU: positive and normative implications," Economics wp37, Department of Economics, Central bank of Iceland. [Downloadable!]

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

Cited by:
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Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," HEI Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008. [Downloadable!]

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This page was last updated on 2009-11-20.

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