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Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials

  • Abbritti, Mirko

    ()

    (University of Navarra)

  • Mueller, Andreas I.

    ()

    (Columbia University)

How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results: First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6488.

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Length: 28 pages
Date of creation: Apr 2012
Date of revision:
Publication status: published in: Journal of Money, Credit and Banking, 2013, 45 (6), 1165-1186
Handle: RePEc:iza:izadps:dp6488
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  1. Jean-Guillaume Sahuc & Frank Smets, 2008. "Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 505-521, 03.
  2. Michael U. Krause & Thomas A. Lubik & David López-Salido, 2008. "Inflation dynamics with search frictions : a structural econometric analysis," Working Paper 08-01, Federal Reserve Bank of Richmond.
  3. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
  4. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
  5. Harris Dellas & George Tavlas, 2005. "Wage Rigidity and Monetary Union," Economic Journal, Royal Economic Society, vol. 115(506), pages 907-927, October.
  6. Carlos Thomas & Francesco Zanetti, 2008. "Labor market reform and price stability: an application to the Euro Area," Working Papers 0818, Banco de España;Working Papers Homepage.
  7. Pierpaolo Benigno & J. David López-Salido, 2002. "Inflation persistence and optimal monetary policy in the Euro Area," Working Papers 0215, Banco de España;Working Papers Homepage.
  8. Andersen, Torben M. & Seneca, Martin, 2007. "Labour Market Asymmetries in a Monetary Union," Kiel Working Papers 1331, Kiel Institute for the World Economy (IfW).
  9. 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.
  10. Poilly, C. & Sahuc, J-G., 2008. "Welfare Implications of Heterogeneous Labor Markets in a Currency Area," Working papers 199, Banque de France.
  11. Alessia Campolmi & Ester Faia, 2011. "Labor market institutions and inflation volatility in the euro area," Post-Print hal-00796300, HAL.
  12. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  13. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc.
  14. Krause, Michael & López-Salido, José David & Lubik, Thomas A., 2007. "Do Search Frictions Matter for Inflation Dynamics?," Kiel Working Papers 1353, Kiel Institute for the World Economy (IfW).
  15. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," Kiel Working Papers 1513, Kiel Institute for the World Economy (IfW).
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