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European Labour Markets and the Euro: How Much Flexibility Do We Really Need?

  • Michael C. Burda


    (Humboldt University Berlin)

Widespread concern over real effects of EMU is consistent with new Keynesian approaches to macroeconomic fluctuations, but more difficult to reconcile with a real business cycle (RBC) paradigm. Using a model with frictions as a point of departure, I speculate that nominal price rigidity in Europe is likely to increase, while real rigidities are likely to decrease, as a consequence of monetary union. This logic implies a new European macroeconomic regime in which monetary policy is increasingly "effective" in influencing output in the short run. Similarly, changes in the nature of real and nominal price determination are likely to increase the volatility of the European business cycle. Empirical evidence of increasing covariation of price inflation and declining correlation of wage inflation and real wage growth within EMU countries in the last decade is consistent with this conjecture. Calls for additional labour market flexibility, given the magnitude of what is already in store for Europe, may be unwarranted.

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Paper provided by European Network of Economic Policy Research Institutes in its series Economics Working Papers with number 003.

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Length: 33 pages
Date of creation: Mar 2001
Date of revision:
Handle: RePEc:epr:enepwp:003
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