Labour Market Asymmetries in a Monetary Union

Torben M Andersen and Martin Seneca

No 6800, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.

Keywords: Business cycles; Monetary policy; Monetary union; Nominal wage rigidity; Shocks; Staggered contracts; Wage formation (search for similar items in EconPapers)
JEL-codes: E30 E52 F41 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Labour Market Asymmetries in a Monetary Union (2010)
Working Paper: Labour Market Asymmetries in a Monetary Union (2007)
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