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Labour Market Reform and Monetary Policy in EMU: Do Asymmetries Matter?

  • Hughes Hallett, Andrew
  • Viegi, Nicola

This Paper analyses the interaction between a common monetary policy and differentiated labour market institutions. We develop a model of a two country monetary union. In each country, labour market institutions are distinguished by the degree of centralization in wage bargaining. In each country the government can also use an instrument (general taxation or payroll taxes) to influence their overall labour costs. Finally a common monetary policy is followed in a ‘conservative’ manner, as defined by Rogoff (1985). The results show that structural and preference asymmetries matter, both in the determination of economic policy and in performance. In particular centralized labour market institutions confer a certain comparative advantage in policy making which provides a natural incentive for the less flexible (or less reformed) to want to join a currency union; and for the more flexible to stay outside. This lowers the incentives for reform inside the union, as Calmfors and others have conjectured.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2979.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2979
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  1. Cukierman, Alex & Lippi, Francesco, 1999. "Labour Markets and Monetary Union: A Strategic Analysis," CEPR Discussion Papers 2236, C.E.P.R. Discussion Papers.
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  5. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
  6. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  7. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  8. Jensen, Henrik, 2001. "Optimal degrees of transparency in monetary policymaking," Discussion Paper Series 1: Economic Studies 2001,04, Deutsche Bundesbank, Research Centre.
  9. Lawrence F. Katz & Olivier Blanchard, 1999. "Wage Dynamics: Reconciling Theory and Evidence," American Economic Review, American Economic Association, vol. 89(2), pages 69-74, May.
  10. Agell, Jonas, 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Working Paper Series 1998:17, Uppsala University, Department of Economics.
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  12. Gruner, Hans Peter & Hefeker, Carsten, 1999. " How Will EMU Affect Inflation and Unemployment in Europe?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(1), pages 33-47, March.
  13. Sibert, Anne, 1999. "Monetary Integration and Economic Reform," Economic Journal, Royal Economic Society, vol. 109(452), pages 78-92, January.
  14. Torben M. Andersen & Niels Haldrup & Jan Rose Sørensen, 2000. "Labour market implications of EU product market integration," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 105-134, 04.
  15. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  16. Alan Krueger, 1999. "From Bismarck to Maastricht: The March to European Union and the Labor Compact," Working Papers 803, Princeton University, Department of Economics, Industrial Relations Section..
  17. Calmfors, Lars, 1998. "Macroeconomic Policy, Wage Setting and Employment - What Difference Does the EMU Make?," Seminar Papers 657, Stockholm University, Institute for International Economic Studies.
  18. Juan F. Jimeno & Jose Vinals, 1998. "The impact of EMU on European unemployment," Working Papers 34, Oesterreichische Nationalbank (Austrian Central Bank).
  19. Anne C. Sibert & Alan Sutherland, . "Monetary Regimes and Labour Market Reform," Discussion Papers 97/14, Department of Economics, University of York.
  20. Alan S. Blinder, 2000. "Central-Bank Credibility: Why Do We Care? How Do We Build It?," American Economic Review, American Economic Association, vol. 90(5), pages 1421-1431, December.
  21. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  22. Soskice, David & Iversen, Torben, 1998. "Multiple Wage-Bargaining Systems in the Single European Currency Area," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 110-24, Autumn.
  23. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
  24. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
  25. Jeffrey C. Fuhrer, 1994. "Goals, guidelines, and constraints facing monetary policymakers: an overview," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-15.
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