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European Labour Markets and the Euro: How much flexibility do we really need? ENEPRI Working Paper No. 3, March 2001

Burda, Michael C. (2001) European Labour Markets and the Euro: How much flexibility do we really need? ENEPRI Working Paper No. 3, March 2001. [Working Paper]

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    Abstract

    Widespread concern over real effects of EMU is consistent with new Keynesian approaches to macroeconomic fluctuations, but more difficult to reconcile with a real business cycle (RBC) paradigm. Using a model with frictions as a point of departure, I speculate that nominal price rigidity in Europe is likely to increase, while real rigidities are likely to decrease, as a consequence of monetary union. This logic implies a new European macroeconomic regime in which monetary policy is increasingly "effective" in influencing output in the short run. Similarly, changes in the nature of real and nominal price determination are likely to increase the volatility of the European business cycle. Empirical evidence of increasing covariation of price inflation and declining correlation of wage inflation and real wage growth within EMU countries in the last decade is consistent with this conjecture. Calls for additional labour market flexibility, given the magnitude of what is already in store for Europe, may be unwarranted.

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    Item Type: Working Paper
    Uncontrolled Keywords: Monetary transmission mechanism.
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > employment/labour market > labour/labor
    EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > ENEPRI Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 02 Jul 2004
    Page Range: p. 33
    Last Modified: 15 Feb 2011 17:20
    URI: http://aei.pitt.edu/id/eprint/1865

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