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Country Size and Labor Market Flexibility in the European Monetary Union: Why Small Countries Have more Flexible Labor Markets

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  • Zemanek, Holger

Abstract

This paper explores the impact of country size on labor market flexibility in a monetary union with a common monetary policy as conducted in EMU. I apply a Barro-Gordon framework and test its result empirically for EMU. Results confirm that small countries demand higher labor market flexibility than large countries. Small countries use labor market flexibility to be protected against monetary policy in favor of large countries and use flexibility as a substitute for monetary policy. Thereby, national inflation volatilities and unemployment volatility are important determinants. Business cycle synchronization reduces the need of small countries for additional labor market flexibility.

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File URL: http://mpra.ub.uni-muenchen.de/19131/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16482.

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Date of creation: 27 Jul 2009
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Handle: RePEc:pra:mprapa:16482

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Keywords: Structural reforms; labor market flexibility; European Monetary Union; country size; Barro-Gordon model; business cycle synchronization;

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  1. Berger, Helge & Hefeker, Carsten, 2005. "One Country, One Vote? Labor Market Structure and Voting Rights in the ECB," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 672-687.
  2. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  3. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2009. "Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness," CESifo Working Paper Series 2639, CESifo Group Munich.
  4. Belke, Ansgar & Herz, Bernhard & Vogel, Lukas, 2005. "Structural Reforms and the Exchange Rate Regime: A Panel Analysis for the World versus OECD Countries," IZA Discussion Papers 1798, Institute for the Study of Labor (IZA).
  5. Romain Duval & Jørgen Elmeskov, 2005. "The Effects of EMU on Structural Reforms in Labour and Product Markets," OECD Economics Department Working Papers 438, OECD Publishing.
  6. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
  9. Carsten Hefeker, 2006. "EMU Enlargement, Policy Uncertainty and Economic Reforms," CESifo Working Paper Series 1767, CESifo Group Munich.
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