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Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment

  • Merkl, Christian

    ()

    (University of Erlangen-Nuremberg)

  • Schmitz, Tom

    ()

    (HEC Paris)

This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4924.

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Length: 29 pages
Date of creation: May 2010
Date of revision:
Publication status: published in: European Journal of Political Economy, 2011, 27 (1), 44-60
Handle: RePEc:iza:izadps:dp4924
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