DP2423 Will EMU Increase Eurosclerosis?

Author(s): Samuel Bentolila, Gilles Saint-Paul
Publication Date: April 2000
Keyword(s): EMU, Eurosclerosis, Labour Market Institutions, Labour Market Reform, Monetary Policy, Monetary Union, Political Economy, Unemployment
JEL(s): E31, E32, E42, E52, E58, J30, J50, J60
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2423

In this paper we study the relationship between labour market institutions and monetary policy. We use a simple macroeconomic framework to show how optimal monetary policy rules depend on labour institutions (labour adjustment costs, and nominal and real wage rigidity) and social preferences regarding inflation, employment, and real wages. We also calibrate our model to compute how the change in social welfare brought about by giving up monetary policy as a result of joining the Economic and Monetary Union (EMU) depends on institutions and preferences. We then use the calibrated model to analyse how EMU affects the incentives for labour market reform, both for reforms that increase the economy's adjustment potential and for those that affect the long-run unemployment rate.