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Monetary Regimes, Labour Mobility and Equilibrium Employment

  • Larsson, Anna

    (Institute for International Economic Studies, Stockholm University)

This paper analyses the impact of the monetary regime on labour markets in a small open economy, by considering the game between large wage setters and an independent central bank in a two-sector model with potential labour mobility between sectors. Two monetary regimes are considered: membership in a monetary union and an inflation target combined with a flexible exchange rate. A key result is that when there is perfect labour mobility between sectors, the monetary regime does not matter for real wages, employment or profits. Moreover, introducing labour mobility substantially reduces wages and increases employment. Other findings are that when labour is immobile between sectors: (i) the real wage in the tradables sector is higher under inflation targeting than in a monetary union, while the reverse applies to the non-tradables sector; (ii) inflation targeting generates higher employment and profits than membership in a monetary union; and (iii) both workers and firms in the two sectors in general prefer inflation targeting to membership in a monetary union.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 745.

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Length: 37 pages
Date of creation: 02 May 2006
Date of revision:
Handle: RePEc:hhs:iiessp:0745
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  1. Cukierman, Alex & Lippi, Francesco, 1999. "Central bank independence, centralization of wage bargaining, inflation and unemployment:: Theory and some evidence," European Economic Review, Elsevier, vol. 43(7), pages 1395-1434, June.
  2. Francesco Lippi, 2000. "Strategic Monetary Policy with Non Atomistic Wage Setters," Econometric Society World Congress 2000 Contributed Papers 1354, Econometric Society.
  3. Alan Manning, 1992. "Wage Bargaining and the Phillips Curve: The Identification and Specification of Aggregate Wage Equations," CEP Discussion Papers dp0062, Centre for Economic Performance, LSE.
  4. Steinar Holden, 2003. "Wage-setting under Different Monetary Regimes," Economica, London School of Economics and Political Science, vol. 70(278), pages 251-265, 05.
  5. Larsson, Anna & Zetterberg, Johnny, 2003. "Does Inflation Targeting Matter for Labour Markets? – Some Empirical Evidence," Working Paper Series 191, Trade Union Institute for Economic Research.
  6. Vartiainen, Juhana, 2002. " Relative Prices in Monetary Union and Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(2), pages 277-87, June.
  7. David Soskice & Torben Iversen, 2000. "The Nonneutrality Of Monetary Policy With Large Price Or Wage Setters," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 265-284, February.
  8. Coricelli, Fabrizio & Cukierman, Alex & Dalmazzo, Alberto, 2000. "Monetary Institutions, Monopolistic Competition, Unionized Labour Markets And Economic Performance," CEPR Discussion Papers 2407, C.E.P.R. Discussion Papers.
  9. Lars Calmfors, 2001. "Wages and Wage-Bargaining Institutions in the Emu : A Survey of the Issues," CESifo Working Paper Series 520, CESifo Group Munich.
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