  
WP 53/2008: Labour market asymmetries in a monetary union
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| Author(s): | Andersen, Torben M.; Seneca, Martin |
| Subject: | Danish economy; Monetary- and foreign-exchange policy; Inflation, wages and prices; Monetary policy |
| Type: | Working Papers |
| Year of publication: | 2008 |
| Date of publication: | 05/26/2008 |
This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.
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