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Country Size and Labor Market Flexibility in the European Monetary Union: Why Small Countries Have more Flexible Labor Markets

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  • Zemanek, Holger

Abstract

This paper explores the impact of country size on labor market flexibility in a monetary union with a common monetary policy as conducted in EMU. I apply a Barro-Gordon framework and test its result empirically for EMU. Results confirm that small countries demand higher labor market flexibility than large countries. Small countries use labor market flexibility to be protected against monetary policy in favor of large countries and use flexibility as a substitute for monetary policy. Thereby, national inflation volatilities and unemployment volatility are important determinants. Business cycle synchronization reduces the need of small countries for additional labor market flexibility.

Suggested Citation

  • Zemanek, Holger, 2009. "Country Size and Labor Market Flexibility in the European Monetary Union: Why Small Countries Have more Flexible Labor Markets," MPRA Paper 16482, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:16482
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    File URL: https://mpra.ub.uni-muenchen.de/19131/1/MPRA_paper_19131.pdf
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    References listed on IDEAS

    as
    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    3. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2005. "Structural Reforms and the Exchange Rate Regime A Panel Analysis for the World versus OECD Countries," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 263/2005, Department of Economics, University of Hohenheim, Germany.
    4. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2009. "Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness," Discussion Papers of DIW Berlin 895, DIW Berlin, German Institute for Economic Research.
    5. Romain Duval & Jørgen Elmeskov, 2005. "The Effects of EMU on Structural Reforms in Labour and Product Markets," OECD Economics Department Working Papers 438, OECD Publishing.
    6. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
    7. Berger, Helge & Hefeker, Carsten, 2005. "One Country, One Vote? Labor Market Structure and Voting Rights in the ECB," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 672-687.
    8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    9. Carsten Hefeker, 2006. "EMU Enlargement, Policy Uncertainty and Economic Reforms," CESifo Working Paper Series 1767, CESifo Group Munich.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Structural reforms; labor market flexibility; European Monetary Union; country size; Barro-Gordon model; business cycle synchronization;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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