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Estimating the costs and benefits of EMU: The impact of external shocks on labour markets

  • Ansgar Belke
  • Daniel Gros

Discussions of the economic costs and benefits of EMU usually take as their basis the optimum currency area (OCA) approach. This approach starts from the premise that when an external shock hits the economy, it is easier to adjust the exchange rate than domestic prices or wages. Most economists accept the general idea behind this approach, namely that nominal wages are usually sticky in the shortrun and that it is therefore easier to adjust to external shocks and obtain changes in the real exchange rate or the terms of trade through a movement in the exchange rate. But there is little agreement on how important these "external" shocks are in reality. We try to measure the importance of external shocks for (un)employment. We find that external shocks have little impact on unemployment, but are more important in the evolution of employment in manufacturing. The results differ, however, strongly from country to country and for about half of EU member countries we did not find any significant relationship. Taking into account various potential shock absorbers (exchange rate movements, fiscal and monetary policy) does not affect the results. We conclude that the loss of the exchange rate instrument will not lead to massive unemployment problems.

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Article provided by Springer in its journal Weltwirtschaftliches Archiv.

Volume (Year): 135 (1999)
Issue (Month): 1 (March)
Pages: 1-47

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Handle: RePEc:spr:weltar:v:135:y:1999:i:1:p:1-47
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