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

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  • Louis Jaeck
  • Sehjeong Kim

Abstract

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

Suggested Citation

  • Louis Jaeck & Sehjeong Kim, 2014. "The Impact of EMU Enlargement on Structural Reforms: A Political Economy Approach," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(1), pages 73-86, February.
  • Handle: RePEc:kap:iaecre:v:20:y:2014:i:1:p:73-86:10.1007/s11294-013-9449-5
    DOI: 10.1007/s11294-013-9449-5
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    More about this item

    Keywords

    European Monetary Union; Lobbying; Common agency; Monetary policy; Structural reforms; D72; E52; E58;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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