Market Regulation, Cycles and Growth in a Monetary Union

Mirko Abbritti and Sebastian Weber

No 2019/123, IMF Working Papers from International Monetary Fund

Abstract: We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members.

Keywords: WP; labor market; Currency union; endogenous growth; labor and product market regulation; R&D investment; product market regulation; business cycle; risk premium shock; TFP dynamics; Total factor productivity; Return on investment; Labor markets; Commodity markets; Inflation; Northern Europe; Southern Europe (search for similar items in EconPapers)
Pages: 52
Date: 2019-06-03
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (6)

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