European Labour Markets and the Euro: How Much Flexibility Do We Really Need?

Michael Burda

No 2217, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Widespread concern over real effects of EMU is consistent with new Keynesian approaches to macroeconomic fluctuations, but more difficult to reconcile with a real business cycle (RBC) paradigm. Using a model with frictions as a point of departure, I speculate that nominal price rigidity in Europe is likely to increase, while real rigidities are likely to decrease, as a consequence of monetary union. This logic implies a new European macroeconomic regime in which monetary policy is increasingly 'effective' in influencing output in the short run. Similarly, changes in the nature of real and nominal price determination are likely to increase the volatility of the European business cycle. Empirical evidence of increasing covariation of price inflation and declining correlation of wage inflation and real wage growth within EMU countries in the last decade is consistent with this conjecture. Calls for additional labour market flexibility, given the magnitude of what is already in store for Europe, may be unwarranted.

Keywords: Euro; European Integration; European Monetary Union; Monetary transmission Mechanism (search for similar items in EconPapers)
JEL-codes: E52 J51 (search for similar items in EconPapers)
Date: 1999-08
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Citations: View citations in EconPapers (32)

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Related works:
Chapter: European Labour Markets and the Euro: How Much Flexibility Do We Really Need? (2001)
Working Paper: European Labour Markets and the Euro: How Much Flexibility Do We Really Need? (2001)
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