Campolmi, A. and Faia, E. (2011) Labor market institutions and inflation volatility in the euro area. Journal of Economic Dynamics and Control, 35(5), pp. 793-812. (doi: 10.1016/j.jedc.2010.07.001)
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Publisher's URL: http://dx.doi.org/10.1016/j.jedc.2010.07.001
Abstract
Despite having had the same currency for many years, EMU countries still have quite different inflation dynamics. In this paper we explore one possible reason: country specific labor market institutions, giving rise to different inflation volatilities. When unemployment insurance schemes differ, as they do in EMU, reservation wages react differently in each country to area-wide shocks. This implies that real marginal costs and inflation also react differently. We report evidence for EMU countries supporting the existence of a cross-country link over the cycle between labor market structures on the one side and real wages and inflation on the other. We then build a DSGE model that replicates the data evidence. The inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.
| Item Type: | Articles |
|---|---|
| Status: | Published |
| Refereed: | Yes |
| Glasgow Author(s) Enlighten ID: | Campolmi, Dr Alessia |
| Authors: | Campolmi, A., and Faia, E. |
| College/School: | College of Social Sciences > Adam Smith Business School > Economics |
| Journal Name: | Journal of Economic Dynamics and Control |
| Publisher: | Elsevier |
| ISSN: | 0165-1889 |
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