Market Regulation, Cycles and Growth in a Monetary Union

53 Pages Posted: 27 Jun 2019

See all articles by Mirko Abbritti

Mirko Abbritti

University of Navarra

Sebastian Weber

International Monetary Fund (IMF)

Date Written: June 2019

Abstract

We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members.

Keywords: Price indexes, Business cycles, Unemployment, Total factor productivity, Employment, Currency union, endogenous growth, labor and product market regulation, TFP, euro area, product market regulation, market regulation, labor market regulation

JEL Classification: F45, F43, O43, O11, E01, E2, J3, E52, O24

Suggested Citation

Abbritti, Mirko and Weber, Sebastian, Market Regulation, Cycles and Growth in a Monetary Union (June 2019). IMF Working Paper No. 19/123, Available at SSRN: https://ssrn.com/abstract=3411032

Mirko Abbritti (Contact Author)

University of Navarra ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Sebastian Weber

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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