Monetary Policy, Country Size and Labour Market Flexibility in the European Monetary Union

25 Pages Posted: 17 Dec 2009

See all articles by Holger Zemanek

Holger Zemanek

University of Leipzig - Institute for Economic Policy

Date Written: December 15, 2009

Abstract

This paper explores the impact of country size on labour market flexibility in a monetary union with a common monetary policy as conducted in EMU. I apply a Barro-Gordon framework and test its result empirically for EMU. Results confirm that small countries demand higher labour market flexibility than large countries. Small countries use labour market flexibility to be protected against monetary policy in favour of large countries and use flexibility as a substitute for monetary policy. Thereby, national inflation volatilities and unemployment volatility are important determinants. Business cycle synchronization reduces the need of small countries for additional labour market flexibility.

Keywords: Structural reforms, labour market flexibility, European Monetary Union, country size, Barro-Gordon model

JEL Classification: D78, E61, F15

Suggested Citation

Zemanek, Holger, Monetary Policy, Country Size and Labour Market Flexibility in the European Monetary Union (December 15, 2009). Available at SSRN: https://ssrn.com/abstract=1523752 or http://dx.doi.org/10.2139/ssrn.1523752

Holger Zemanek (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Strasse 12
Leipzig, 40109
Germany

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