A single monetary policy for heterogeneous labour markets: the case of the euro area

Sandra Gomes, Pascal Jacquinot and Matija Lozej

No 2769, Working Paper Series from European Central Bank

Abstract: Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment. Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households. JEL Classification: E24, E32, E43, E52, F45

Keywords: business cycles; DSGE modelling; monetary union; search and matching (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mon
Note: 725400
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Related works:
Working Paper: A single monetary policy for heterogeneous labour markets: the case of the euro area (2023)
Working Paper: A single monetary policy for heterogeneous labour markets: the case of the euro area (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232769

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