|
|
European
Monetary System
Labour market effects
Many argue that the
EMS has assisted disinflation by providing its members with a
`credibility bonus': commitment to the Exchange Rate Mechanism has
linked the non-German EC member countries' macroeconomic policies to
Germany's and hence encouraged expectations that their inflation will
ultimately converge on the German level. In Discussion Paper No. 598,
Research Fellow Michael Artis and Paul Ormerod model the
effect of German inflation on the inflation predictors of the other ERM
members, using a model that marks the beginning of the `EMS period'
(with a flexible break point) and in which they incorporate
country-specific information on significant institutional changes
derived from the relevant OECD Economic Surveys. For France and Italy,
they find that German inflation had a significant influence on inflation
after the break points; for Belgium and the Netherlands, it had a
significant influence in both pre- and post-EMS estimates; German
inflation itself was a notably stable process over the whole period.
These results indicate that the ERM has caused German inflation to exert
a significant influence on the other members' inflation processes, while
its own has remained remarkably stable, which is entirely consistent
with the `German leadership' hypothesis.
Artis and Ormerod also investigate the implications of ERM membership
for European labour market structures by estimating a general model of
wage determination. They report a marked reduction or even stagnation in
the real wage growth of all the nonGerman members shortly after the ERM
began and also a change in the trend of realized real wages after some
significant disturbances to previous relationships, which coincided with
a period of sharp institutional change in some countries.
These findings may indicate both the emergence of German inflation as a
major predictor of domestic inflation and a modification of wage
determination processes as a result of the `EMS effect'. Alternatively,
the institutional adjustments may simply be correlated with the entry of
German inflation into the other member countries' inflation processes,
with a residual adjustment achieved through changes in the determinants
of their wage inflation. The wage equations indicate that Belgium
experienced a very sharp downward shift in the implied rate of increase
of the real wage sought; in France and Italy there was a period of
disturbed transition shortly after entry to the ERM. Although many of
these institutional adjustments proved temporary, there is evidence of
some large structural changes (e.g. in Belgium). While the `EMS effect'
therefore appears to have had some effect on European labour markets,
assessments of its extent must be qualified by also considering the
strength of the rise in unemployment everywhere.
Is there
an `EMS' Effect in European Labour Markets?
Michael J Artis and Paul Ormerod
Discussion Paper No. 598, December 1991 (IM)
|
|