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Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus

  • Kayam, Saime S.

In this paper, I consider two heterogeneous economies that engage in a currency union. The small economy adopts the currency of the large and is highly dependent on its wealthier partner for trade. The effects of a currency union, deficit financing and institutional restraints on inflation are analyzed in a dual economy with different wage-setting mechanisms. In the model, Northern Cyprus is the small economy and Turkey, being the only country that acknowledges it as an independent state is its larger partner. Features of the labour markets determine the wages. We make a conjecture that wage determination in Northern Cyprus (NC) is conducted with reference to centralized-bargaining and that decentralized bargaining sets the wages in Turkey (TR). Hence, the differences in wage-setting procedures cause a dual labour market. In order to incorporate monetary dependence into the analysis, we let the Turkish central bank to decide on the economic policy measures, in this case the inflation rate and unemployment. The institutional restraints such as economic sanctions increase the inflexibility in the NC and cause shocks to affect the economy more. In order to compensate for the losses that might be endured by the government in NC, TR finances the budget deficit of NC. Therefore, TR government needs to consider the burden of this financing issue.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39154.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:39154
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  1. Huizinga, Harry, 1993. " International Market Integration and Union Wage Bargaining," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(2), pages 249-55.
  2. R A Read & H W Armstrong, 1998. "Trade and growth in small states: the impact of global trade liberalisation," Working Papers 539452, Lancaster University Management School, Economics Department.
  3. Silvana Tenreyro & Robert J. Barro, 2002. "Economic effects of currency unions," Working Papers 02-4, Federal Reserve Bank of Boston.
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  6. Gruner, Hans Peter & Hefeker, Carsten, 1999. " How Will EMU Affect Inflation and Unemployment in Europe?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(1), pages 33-47, March.
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  8. Margarida Duarte & Alexander L. Wolman, 2003. "Fiscal policy and regional inflation in a currency union," Working Paper 03-11, Federal Reserve Bank of Richmond.
  9. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, vol. 103(417), pages 379-85, March.
  10. Patrick Villieu & Nelly Gregoriadis & Florina Semenescu, 2006. "Monetary Policy and Inflation Divergences in a Heterogeneous Monetary Union," Working Papers halshs-00071195, HAL.
  11. Steinar Holden, 2001. "Monetary Regimes and the Co-Ordination of Wage Setting," CESifo Working Paper Series 429, CESifo Group Munich.
  12. Manning, Alan, 1987. "An Integration of Trade Union Models in a Sequential Bargaining Framework," Economic Journal, Royal Economic Society, vol. 97(385), pages 121-39, March.
  13. Badarau-Semenescu, C. & Gregoriadis, N., 2009. "Monetary Policy and National Divergences in a Heterogeneous Monetary Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 24, pages 408-434.
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