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Do Labour Market Reforms Achieve a Double Dividend under EMU? Discretionary versus Rule-based Monetary Policy Revisited

  • Belke, Ansgar

    ()

    (Ruhr-Universitaet Bochum)

  • Kamp, Martina

    (Ruhr-Universitaet Bochum)

High equilibrium unemployment and the inflation bias in some EU countries require fundamental reforms of labour-market institutions. Impacts of different monetary regimes inside and outside EMU on the incentives for labour- market reforms are examined in a Barro- Gordon framework from the perspective of a single country. Monetary policy (discretionary versus rule-based) and the degree of labour-market reforms are determined simultaneously. It can be shown that discretionary policy outside EMU leads to a higher degree of reforms than rulebased policy since in the former case reforms reduce both unemployment and the inflation bias. However, rule-based monetary policy inside EMU limits the bene - fits of reforms to a positive impact on employment. Nevertheless, total economy welfare under EMU is superior to the one under discretionary policy. Insofar as a superior instrument is available for the parallel reduction of the equilibrium inflation rate, namely a strict monetary policy rule, the higher degree of labourmarket reforms under discretionary monetary policy outside EMU only signals a kind of an overshooting.

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Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 14 (1999)
Issue (Month): ()
Pages: 572-605

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Handle: RePEc:ris:integr:0118
Contact details of provider: Web page: http://econo.sejong.ac.kr/

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