Working Paper: CEPR ID: DP2745
Authors: Fabrizio Coricelli; Alex Cukierman; Alberto Dalmazzo
Abstract: This Paper develops a framework for the analysis of the effects of institutions on economic performance in a monetary union in the presence of stabilization policy, unionized labour markets and monopolistically competitive price setting firms. Nominal wages are fixed contractually. In spite of full price flexibility transmission of monetary policy operates via both aggregate demand and aggregate supply channels. The Paper relates average, as well as country-specific, economic performance within the monetary union, broken down to country size, number of unions, the degree of product differentiation in product markets, and central bank conservativeness. Economic performance is characterized by unemployment, inflation, real wages and competitiveness. Both average, as well as country-specific, economic performance in the presence of (possibly) heterogeneous shocks and a unified stabilization policy are evaluated.
Keywords: central bank conservativeness; monetary union; monopolistic competition; shocks; stabilization; stabilization policy; wage bargaining
JEL Codes: E24; E31; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank conservativeness (E58) | Average inflation (E31) |
| Central bank conservativeness (E58) | Average unemployment (J64) |
| Centralized wage bargaining (J52) | Lower unemployment rates (J68) |
| Centralized wage bargaining (J52) | Higher competitiveness in foreign trade (F14) |
| Conservative central bank (E58) | Average economic performance (P17) |
| Conservative central bank (E58) | Effectiveness of stabilization policies during shocks (E63) |
| Demand shocks (E39) | Central bank offsets effects (E52) |
| Central bank offsets effects (E52) | Stabilization of individual country outcomes (E63) |