Working Paper: CEPR ID: DP4802
Authors: Ansgar Belke; Leo Kaas; Ralph Setzer
Abstract: According to the traditional 'optimum currency area' approach, the case for adopting a common currency is stronger if the countries are subject to relatively similar output shocks. This Paper takes a different approach and highlights the fact that high exchange rate volatility may as well signal high costs for labour markets. The impact of exchange rate volatility on labour markets in the CEECs is analysed, finding that volatility vis-à-vis the euro significantly lowers employment growth and raises the unemployment rate. Hence, the elimination of exchange rate volatility can be considered equally important for labour markets as a removal of employment protection legislation.
Keywords: Central and Eastern Europe; Currency Union; Euroization; Exchange Rate Variability; Job Creation
JEL Codes: E42; F36; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate volatility (F31) | employment growth (O49) |
| exchange rate volatility (F31) | unemployment rate (J64) |
| employment growth (O49) | job creation (J68) |
| exchange rate volatility (F31) | delays in hiring (J23) |
| labor market rigidities (J48) | negative impact of exchange rate volatility on employment (F66) |
| exchange rate volatility (F31) | investment decisions (G11) |