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Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment

  • Biroli, Pietro
  • Mourre, Gilles
  • Turrini, Alessandro Antonio

This paper analyses the adjustment mechanism in the euro area. Results show that the real exchange rate (REER) adjusts in such a way to redress cyclical divergences and that after monetary unification REER dynamics have become less reactive to country-specific shocks but also less persistent. It is found that regulations, notably affecting price and wage nominal flexibility and employment protection, play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter for both the reaction of price competitiveness to cyclical divergences (differences between national and euro-area output gaps) and for the inertia of competitiveness indicators. Moreover, regulations appear to matter also for the extent to which common shocks may have country-specific effects on price competitiveness, as revealed by their interaction with proxies of unobservable common shocks á-la Blanchard and Wolfers (2000). In light of the tendency towards less stringent regulations in past decades, the results seem consistent with the observed reduction in the persistence of inflation differentials, and have implications for the design of adjustment-friendly product and labour market reforms.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8010.

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Date of creation: Sep 2010
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Handle: RePEc:cpr:ceprdp:8010
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  1. Fabiani, Silvia & Druant, Martine & Hernando, Ignacio & Kwapil, Claudia & Landau, Bettina & Loupias, Claire & Martins, Fernando & Mathä, Thomas Y. & Sabbatini, Roberto & Stahl, Harald & Stokman, Ad C., 2005. "The pricing behaviour of firms in the euro area: new survey evidence," Working Paper Series 0535, European Central Bank.
  2. Holden Steinar & Wulfsberg Fredrik, 2008. "Downward Nominal Wage Rigidity in the OECD," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-50, April.
  3. Alfonso Arpaia & Karl Pichelmann, 2007. "Nominal and real wage flexibility in EMU," European Economy - Economic Papers 281, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  4. Romain Duval & Jørgen Elmeskov & Lukas Vogel, 2007. "Structural Policies and Economic Resilience to Shocks," OECD Economics Department Working Papers 567, OECD Publishing.
  5. Andrea Bassanini & Romain Duval, 2006. "Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions," OECD Social, Employment and Migration Working Papers 35, OECD Publishing.
  6. Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe," Working Paper 2004/5, Norges Bank.
  7. Paul Conway & Véronique Janod & Giuseppe Nicoletti, 2005. "Product Market Regulation in OECD Countries: 1998 to 2003," OECD Economics Department Working Papers 419, OECD Publishing.
  8. Paul Conway & Giuseppe Nicoletti, 2006. "Product Market Regulation in the Non-Manufacturing Sectors of OECD Countries: Measurement and Highlights," OECD Economics Department Working Papers 530, OECD Publishing.
  9. Steinar Holden, 2002. "The Costs of Price Stability - Downward Nominal Wage Rigidity in Europe," NBER Working Papers 8865, National Bureau of Economic Research, Inc.
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