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Will EMU increase eurosclerosis?
Saint Paul, Gilles; Bentolila, Samuel
Universitat Pompeu Fabra. Departament d'Economia i Empresa
In this paper we study the relationship between labor market institutions and monetary policy. We use a simple macroeconomic framework to show how optimal monetary policy rules depend on labor institutions (labor adjustment costs, and nominal and real wage rigitidy) and social preferences regarding inflation, employment, and real wages. We also calibrate our model tocompute 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 analyze how EMU affects the incentives for labor market reform, both for reformsthat increase the economy's adjustment potential and for those that affect the long-run unemployment rate.
Macroeconomics and International Economics
monetary union
labor market institutions
monetary policy
labor market reform
political economy
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