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Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment

Christian Merkl () and Tom Schmitz

No 4924, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.

Keywords: unemployment benefits; labor turnover costs; output and inflation volatility; labor market institutions; unemployment; eurozone (search for similar items in EconPapers)
JEL-codes: E24 E32 J20 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-05
New Economics Papers: this item is included in nep-eec, nep-lab and nep-mac
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Published in: European Journal of Political Economy, 2011, 27 (1), 44-60

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Related works:
Journal Article: Macroeconomic volatilities and the labor market: First results from the euro experiment (2011) Downloads
Working Paper: Macroeconomic volatilities and the labor market: first results from the euro experiment (2009) Downloads
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