Working Paper: CEPR ID: DP2979
Authors: Andrew Hughes Hallett; Nicola Viegi
Abstract: This Paper analyses the interaction between a common monetary policy and differentiated labour market institutions. We develop a model of a two country monetary union. In each country, labour market institutions are distinguished by the degree of centralization in wage bargaining. In each country the government can also use an instrument (general taxation or payroll taxes) to influence their overall labour costs. Finally a common monetary policy is followed in a ?conservative? manner, as defined by Rogoff (1985). The results show that structural and preference asymmetries matter, both in the determination of economic policy and in performance. In particular centralized labour market institutions confer a certain comparative advantage in policy making which provides a natural incentive for the less flexible (or less reformed) to want to join a currency union; and for the more flexible to stay outside. This lowers the incentives for reform inside the union, as Calmfors and others have conjectured.
Keywords: asymmetries; labour market institutions; monetary union
JEL Codes: E58; E61; F33; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Centralized labour market institutions (J48) | Comparative advantage in policy making (D78) |
| Countries with centralized institutions (P16) | Preference to join a currency union (F36) |
| Decentralized systems (P40) | Incentive to remain outside the currency union (F36) |
| Structural asymmetries (F12) | Economic policy outcomes (F68) |
| Fully centralized labour market (J48) | Asymmetric response to shocks (F41) |
| Asymmetric response to shocks (F41) | Additional economic policy instrument (E64) |
| Countries with decentralized systems (H77) | Lack of additional economic policy instrument (E69) |
| Coordination of economic policies (F42) | Macroeconomic stability (E60) |