Do Labour Market Reforms Achieve a Double Dividend under EMU? Discretionary versus Rule-based Monetary Policy Revisited

Ansgar Belke and Martina Kamp
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Martina Kamp: Ruhr-Universitaet Bochum, Postal: Ruhr-Universitaet Bochum

Journal of Economic Integration, 1999, vol. 14, 572-605

Abstract:

High equilibrium unemployment and the inflation bias in some EU countries require fundamental reforms of labour-market institutions. Impacts of different monetary regimes inside and outside EMU on the incentives for labour- market reforms are examined in a Barro- Gordon framework from the perspective of a single country. Monetary policy (discretionary versus rule-based) and the degree of labour-market reforms are determined simultaneously. It can be shown that discretionary policy outside EMU leads to a higher degree of reforms than rulebased policy since in the former case reforms reduce both unemployment and the inflation bias. However, rule-based monetary policy inside EMU limits the bene - fits of reforms to a positive impact on employment. Nevertheless, total economy welfare under EMU is superior to the one under discretionary policy. Insofar as a superior instrument is available for the parallel reduction of the equilibrium inflation rate, namely a strict monetary policy rule, the higher degree of labourmarket reforms under discretionary monetary policy outside EMU only signals a kind of an overshooting.

Keywords: European Monetary Union; inflation bias; labor market reform; monetarypolicy regime; political economy of structural unemployment (search for similar items in EconPapers)
JEL-codes: E52 E61 J38 (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0118

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