Paper #449

Title:

Will EMU increase eurosclerosis?

Authors:

Gilles Saint Paul and Samuel Bentolila

Date:

March 2000

Abstract:

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 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 analyze how EMU affects the incentives for labor market reform, both for reforms that increase the economy's adjustment potential and for those that affect the long-run unemployment rate.

Keywords:

EMU, monetary union, labor market institutions, monetary policy, labor market reform, eurosclerosis, political economy, unemployment

JEL codes:

E52, E58, E31, E32, E42, J30, J50, J60

Area of Research:

Macroeconomics and International Economics

Published in:

EMU: Impact on Europe and the World, C. Wyplosz, ed., WIDER and Oxford University Press, 2001

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