Cyclical inflation divergence and different labor market institutions in the EMU

Ester Faia and Alessia Campolmi

No 619, Working Paper Series from European Central Bank

Abstract: This paper relates the size of the cyclical inflation differentials, currently observed for euro area countries, to the differences in labor market institutions across the same set of countries. It does that by using a DSGE model for a currency area with sticky prices and labor market frictions. We show that differences in labor market institutions account well for cyclical inflation differentials. The proposed mechanism is a supply side one in which differences in labor market institutions generate different dynamics in real wages and consequently in marginal costs and inflations. We test this mechanism in the data and find that the model replicates well the empirical facts. JEL Classification: E52, E24

Keywords: cyclical inflation divergence; EMU; labor market institutions (search for similar items in EconPapers)
Date: 2006-05
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Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006619

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