Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment

Pietro Biroli (), Gilles Mourre and Alessandro Turrini

No 428, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper assesses the adjustment mechanism in the euro area. Results show that the real exchange rate (REER) adjusts in such a way to redress cyclical divergences and that after monetary unification REER dynamics have become less reactive to country-specific shocks but also less persistent. It is found that regulations, notably affecting price and wage nominal flexibility and employment protection, play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter forboth the reaction of price competitiveness to cyclical divergences (differences between national and euro-area output gaps) and for the inertia of competitiveness indicators. Moreover, regulations appear to matter also for the extent to which common shocks may end up producing country-specific effects on the price competitiveness, as revealed by their interaction with proxies of unobservable common shocks along the lines of the methodology developed in Blanchard and Wolfers (2000). In light of the tendency towards less stringent regulations in past decades, the results seem consistent with the observed reduction in the persistence of inflation differentials, and has have implications for the design of adjustment-friendly product and labour market reforms.

JEL-codes: E30 F41 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-reg
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0428

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