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Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications

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Abstract

How do asymmetric labor market institutions affect the volatility of inflation and unemployment differentials in a currency union? What are the implications for monetary policy? To answer these questions, this paper sets up a DSGE currency union model with unemployment, hiring frictions and real wage rigidities. The model provides a rigorous but tractable framework for the analysis of the functioning of a currency union characterized by asymmetric labor market institutions. Positively, we find that inflation and unemployment differentials strongly depend on the underlying labor market structures. Moreover, asymmetries in labor market structures increase the volatility of both inflation and unemployment differentials. Normatively, we find that the optimal inflation target should give a higher weight to regions with more sclerotic labor markets but with more flexible real wages.

Suggested Citation

  • Mirko Abbritti & Andreas Mueller, 2007. "Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications," IHEID Working Papers 02-2009, Economics Section, The Graduate Institute of International Studies, revised Apr 2009.
  • Handle: RePEc:gii:giihei:heidwp02-2009
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    Cited by:

    1. Abbritti, Mirko & Weber, Sebastian, 2010. "Labor market institutions and the business cycle Unemployment rigidities vs. real wage rigidities," Working Paper Series 1183, European Central Bank.
    2. Merkl, Christian & Schmitz, Tom, 2011. "Macroeconomic volatilities and the labor market: First results from the euro experiment," European Journal of Political Economy, Elsevier, vol. 27(1), pages 44-60, March.
    3. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," IHEID Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008.
    4. Spruk, Rok, 2010. "Iceland's Economic and Financial Crisis: Causes, Consequences and Implications," MPRA Paper 29972, University Library of Munich, Germany.

    More about this item

    Keywords

    Currency Union; labor market frictions; real wage rigidities; unemployment; sticky prices; inflation differentials; optimal monetary policy.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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