Asymmetric Labor Market Institutions in the EMU: positive and normative implications
AbstractHow do labor market institutions affect the volatility and persistence of inflation and unemployment in a monetary union? What are the implications for monetary policy? 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 depend strongly on the underlying labor market structure: the hiring friction lowers the persistence and increases the volatility of the inflation differential whereas real wage rigidities imply more persistence and variability in output and unemployment differentials. Normatively, we find that macroeconomic stabilization is easier when labor market frictions are high and real wage rigidities are low. This has important implications for optimal monetary policy: The optimal inflation target should give a higher weight to regions with more sclerotic labor markets and more flexible real wages.
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Bibliographic InfoPaper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp37.
Date of creation: Dec 2007
Date of revision:
Other versions of this item:
- Mirko Abbritti & Andreas Mueller, 2007. "Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications," IHEID Working Papers 02-2009, Economics Section, The Graduate Institute of International Studies, revised Apr 2009.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-DGE-2008-02-09 (Dynamic General Equilibrium)
- NEP-EEC-2008-02-09 (European Economics)
- NEP-LAB-2008-02-09 (Labour Economics)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-MON-2008-02-09 (Monetary Economics)
- NEP-OPM-2008-02-09 (Open Economy Macroeconomic)
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- Abbritti, Mirko & Weber, Sebastian, 2010. "Labor market institutions and the business cycle Unemployment rigidities vs. real wage rigidities," Working Paper Series 1183, European Central Bank.
- Spruk, Rok, 2010. "Iceland's Economic and Financial Crisis: Causes, Consequences and Implications," MPRA Paper 29972, University Library of Munich, Germany.
- Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," IHEID Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008.
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