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Asymmetric labor market institutions in the EMU and the volatility of inflation and unemployment differentials By Mirko

Asymmetric labor market institutions in the EMU and the volatility of inflation and unemployment differentials By Mirko Abbritti and Andreas Mueller. Discussion by Leo de Haan DNB/IMF workshop on preventing and correcting macroeconomic imbalances in the euro area Amsterdam 13-14 October 2011.

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Asymmetric labor market institutions in the EMU and the volatility of inflation and unemployment differentials By Mirko

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  1. Asymmetric labor market institutions in the EMU and the volatility of inflation and unemployment differentials By Mirko Abbritti and Andreas Mueller Discussion by Leo de Haan DNB/IMF workshop on preventing and correcting macroeconomic imbalances in the euro area Amsterdam 13-14 October 2011

  2. Contribution • It is important to distinguish between different labor market rigidities in a currency union: • Unemployment rigidities (UR) • Real wage rigidities (RWR)

  3. Question 1 • Policy implication? • Stimulate union wide RWR for flatter Phillips curve?

  4. Analysis scheme • Currency union: Home region + Foreign region

  5. Case 1: Asymmetric shock with symmetric labor market structure • Finding: UR and RWR have different effects on inflation and unemployment differentials

  6. Question 2 • Policy implication? • Stimulate union wide UR for lower unemployment differentials due to asymmetric shocks?

  7. Case 2: Symmetric shock with asymmetric labor market structure • Finding: Asymmetries in labor market structures deteriorate adjustment of currency union to symmetric shocks

  8. Paper makes policy implication clear • Remove all labor market asymmetries. Because they deteriorate adjustment to symmetric shocks.

  9. New dimension: Two types of labor market asymmetry

  10. Case of (any kind of) shock with asymmetric labor market structure • => ‘Substitutes’ enforce effects of labor market asymmetries, while ‘complements’ offset them

  11. Question 3 • Policy implication? • Remove labor market asymmetries only/especially when these are substitutes?

  12. Two general comments

  13. General comment 1 • Paper focuses on volatilities of inflation and unemployment differentials • However, policy focuses more on size and persistence of differentials • Are these two analytical concepts fully compatible?

  14. General comment 2 • Which policy trade-off between: • Volatility of inflation differentials • Volatility of unemployment differentials* * Complication: how to define ‘inefficient part’ of unemployment fluctuations in real world?

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