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Macroeconomic volatilities and the labor market: first results from the euro experiment

Christian Merkl () and Tom Schmitz

No 1511, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

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. Real wage rigidities do not seem to play much of a role. This result is in line with our employed labor market model, but stands in stark contrast to the search and matching model. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility. Our estimations indicate that the latter is driven instead to a certain extent by differences in government spending volatility.

Keywords: Labor market institutions; macroeconomic volatility; monetary policy; firing costs; unemployment benefits; replacement rate (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Date: 2009
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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 (2010) Downloads
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