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Labour Market Reform and the Effectiveness of Monetary Policy in EMU

Andrew Hughes Hallett () and Nicola Viegi ()

Journal of Economic Integration, 2003, vol. 18, 726-749

Abstract: This paper analyses the interaction between a common monetary policy and differentiated labour market institutions. We develop a model of a two country monetary union. In each country, labour markets are distinguished by the degree of centralisation in wage bargaining. In each country the government can also use an instrument (general taxation or payroll taxes) to influence their overall labour costs. Finally a common monetary policy is followed in a "conservative" manner, as defined by Rogoff (1985). The results show structural and preference asymmetries matter, both in the determination of economic policy and in performance. In particular, centralised labour market institutions confer a certain comparative advantage in policy making which provides a natural incentive for the less flexible (or less reformed) to want to join a currency union; and also for the more flexible to stay outside. This lowers the incentives for reform inside the union, as Calmfors and others have conjectured.

Keywords: Monetary union; Labour market institutions; Asymmetries (search for similar items in EconPapers)
JEL-codes: E58 E61 F33 J51 (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0257

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