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EMU and the Icelandic labour market

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Listed:
  • Sveinn Agnarsson
  • Axel Hall
  • Tryggvi Thor Herbertsson
  • Sigurður Ingólfsson
  • Gylfi Magnússon
  • Gylfi Zoega

Abstract

In this paper we look at the costs and benefits for Iceland from joining the EMU from a labour-market perspective. We conclude that none of Mundell's three criteria for an optimal currency area are at present fulfilled for Iceland and the initial Euro zone. Shocks to the Icelandic economy are found to be asymmetric with those experienced in other countries, nominal wages rigid, and migration limited. The painful adjustment of the Faeroese economy to macroeconomic shocks in the early 1990s suggests that the disadvantages of not having a separate currency can be substantial if nominal wages are rigid. Substantial variation in labour market participation and frequent adjustments of the exchange rate seem to have held unemployment in check in Iceland, at least until around 1988.

Suggested Citation

  • Sveinn Agnarsson & Axel Hall & Tryggvi Thor Herbertsson & Sigurður Ingólfsson & Gylfi Magnússon & Gylfi Zoega, 1999. "EMU and the Icelandic labour market," Economics wp03, Department of Economics, Central bank of Iceland.
  • Handle: RePEc:ice:wpaper:wp03
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    References listed on IDEAS

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    1. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
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    3. Maurice Obstfeld, 1998. "Open‐Economy Macroeconomics: Developments in Theory and Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 247-275, March.
    4. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    5. Hochreiter, Eduard & Winckler, Georg, 1995. "The advantages of tying Austria's hands: The success of the hard currency strategy," European Journal of Political Economy, Elsevier, vol. 11(1), pages 83-111, March.
    6. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 205-228.
    7. Katz, E & Paroush, J & Kahana, N, 1982. "Price Uncertainty and the Price Discriminating Firm in International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 389-400, June.
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