Labor market institutions and inflation volatility in the euro area
Journal of Economic Dynamics and Control, ISSN: 0165-1889, Vol: 35, Issue: 5, Page: 793-812
2011
- 68Citations
- 39Captures
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Article Description
Despite having had the same currency for many years, EMU countries still have quite different inflation dynamics. In this paper we explore one possible reason: country specific labor market institutions, giving rise to different inflation volatilities. When unemployment insurance schemes differ, as they do in EMU, reservation wages react differently in each country to area-wide shocks. This implies that real marginal costs and inflation also react differently. We report evidence for EMU countries supporting the existence of a cross-country link over the cycle between labor market structures on the one side and real wages and inflation on the other. We then build a DSGE model that replicates the data evidence. The inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.
Bibliographic Details
http://www.sciencedirect.com/science/article/pii/S0165188910001612; http://dx.doi.org/10.1016/j.jedc.2010.07.001; http://www.scopus.com/inward/record.url?partnerID=HzOxMe3b&scp=79952192736&origin=inward; https://linkinghub.elsevier.com/retrieve/pii/S0165188910001612; http://www.sciencedirect.com/science/article/pii/S0165188910001612?via%3Dihub; http://linkinghub.elsevier.com/retrieve/pii/S0165188910001612; http://www.sciencedirect.com/science/article/pii/S0165188910001612?via=ihub; http://linkinghub.elsevier.com/retrieve/articleSelectSinglePerm?Redirect=http://www.sciencedirect.com/science/article/pii/S0165188910001612?via%3Dihub
Elsevier BV
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