DP4802 Exchange Rate Volatility and Labour Markets in the CEE Countries

Author(s): Ansgar Belke, Leo Kaas, Ralph Setzer
Publication Date: December 2004
Keyword(s): Central and Eastern Europe, currency union, euroization, exchange rate variability, job creation
JEL(s): E42, F36, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4802

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.