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When is labour market flexibility welcome? More on asymmetric policy impacts in Europe


  • S. Sgherri


This paper provides further model-based evidence about the effects of engaging in an Economic and Monetary Union (EMU) when monetary transmission mechanisms differ across countries. Sensitivity analysis to alternative monetary regimes shows that with EMU, where exchange-rate fluctuations are internalised and monetary co-operation enforced, the overall sensitivity to symmetric monetary shocks is likely to be weaker than under different arrangements. This may render cross-country asymmetries in policy responses less evident, at least with respect to the core European economies. Conversely, for countries characterised by higher flexibility, EMU seems to induce policy overreaction compared with uncoordinated monetary stances. In this way, it could widen the gap between rigid and flexible economies. Although different degrees of rigidity in country-specific inflation-output relationships are found sufficient to undermine synchronisation in their business cycle under EMU, labour market discipline is not able to ensure convergence on its own. In particular, responsiveness to monetary changes is to be greater, ceteris paribus, in high-debt countries. On this basis, the paper argues that increased nominal and real flexibility in these labour markets would only trigger further cyclicity in the face of common monetary shocks. This seems to suggest a clear ordering in the sequence of structural reforms these countries need to undertake.

Suggested Citation

  • S. Sgherri, 2000. "When is labour market flexibility welcome? More on asymmetric policy impacts in Europe," WO Research Memoranda (discontinued) 619, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:619

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    References listed on IDEAS

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    Cited by:

    1. Wallis, Kenneth F., 2004. "Comparing empirical models of the euro economy," Economic Modelling, Elsevier, vol. 21(5), pages 735-758, September.
    2. Alexis Penot, 2002. "Appréciations et conséquences possibles de l'hétérogénéité structurelle de la zone euro," Revue d'Économie Financière, Programme National Persée, vol. 65(1), pages 153-175.

    More about this item


    Asymmetric monetary transmissions; Economic and Monetary Union; nominal and real wage rigidities;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling


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