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The Impact of EMU Enlargement on Structural Reforms: A Political Economy Approach

  • Louis Jaeck

    ()

  • Sehjeong Kim

    ()

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    This paper analyzes the setting of labor market reforms in the European Monetary Union (EMU), as a political compromise pressured by the lobbying of business interests and trade unions. Using a common agency model of lobbying, we model the impact of distorted and non-distorted Central Bank monetary policy on EMU member state incentives to reform its labor market. Paradoxically, a majority of citizens who do not support the reform can lead to an optimal level of reform. We also show that, in a context of EMU enlargement, inflationary policy generates a status quo if there is a majority of non-supporters. Surprisingly, inflationary policy enhances the reform if the share of non-supporters over supporters increases, and weakens it if this share decreases. Copyright International Atlantic Economic Society 2014

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    File URL: http://hdl.handle.net/10.1007/s11294-013-9449-5
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    Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

    Volume (Year): 20 (2014)
    Issue (Month): 1 (February)
    Pages: 73-86

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    Handle: RePEc:kap:iaecre:v:20:y:2014:i:1:p:73-86
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