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Will EMU Increase Eurosclerosis?

  • Saint-Paul, G.
  • Bentolila, S.

In this paper we study the relationship between labor market institutions and monetary policy. We use a simple macroeconomic framework to show how optimal monetary policy rules depend on labor institutions (labor adjustment costs, and nominal and real wage rigitidy) and social preferences regarding inflation, employment, and real wages. We also calibrate our model to compute how the change in social welfare brought about by giving up monetary policy as a result of joining the Economic and Monetary Union (EMU) depends on institutions and preferences. We then use the calibrated model to analyze how EMU affects the incentives for labor market reform, both for reforms that increase the economy's adjustment potential and for those that affect the long-run unemployment rate.

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Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 0004.

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Length: 56 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:cemfdt:0004
Contact details of provider: Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Phone: 914290551
Fax: 914291056
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