Markups and the Euro

David Cook ()

The Review of Economics and Statistics, 2011, vol. 93, issue 4, 1440-1452

Abstract: This paper reports evidence that OECD economies adopting fixed exchange rates in the process of forming the European currency union experienced declines in labor share of income at the industry level. This occurs most sharply among countries that experienced the biggest changes in their exchange rate policy. An implication of New Keynesian sticky price theory is that monetary policy has a first-order impact on labor share through the interaction of business cycle uncertainty and the choice of optimal markups. However, there is also evidence that goods market integration encouraged by the euro had a negative impact on the bargaining position of labor. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2011
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