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Labour Market Asymmetries in a Monetary Union

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Author Info
Torben M. Andersen
Martin Seneca
Abstract

This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries can have important effects, and that there are substantial spill-over effects. Among other things, it is found that aggregate output volatility is not strictly increasing in nominal rigidity but hump-shaped. A disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, but in general an inflexible country does not necessarily achieve more output stability by becoming more flexible. As this may be desirable for the monetary union as a whole, there is a risk of a ’reform deficit’ in an asymmetric monetary union.

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File URL: http://www.ifw-members.ifw-kiel.de/publications/labour-market-asymmetries-in-a-monetary-union/kap1331.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1331.

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Length: 36 pages
Date of creation: Jun 2007
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Handle: RePEc:kie:kieliw:1331

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Related research
Keywords: wage formation nominal wage rigidity staggered contracts monetary policy monetary union business cycles shocks

Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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

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