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Macroeconomic volatilities and the labor market: First results from the euro experiment

  • Merkl, Christian
  • Schmitz, Tom

We analyze the effects of labor market institutions (LMIs) on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences. We use a New Keynesian model with unemployment to predict the effects of LMIs. In our empirical estimations, we find that higher labor turnover costs have a significant negative effect on output volatility, while replacement rates have a positive effect, both in line with theory. While LMIs have a large effect on output volatility, they do not matter much for inflation volatility.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 27 (2011)
Issue (Month): 1 (March)
Pages: 44-60

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Handle: RePEc:eee:poleco:v:27:y:2011:i:1:p:44-60
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