Kiel Working Papers, Kiel Institute for World Economics
No 1511:
Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment
Christian Merkl and Tom Schmitz
Abstract: This paper analyzes the effects of different labor market
institutions on inflation and output volatility. The eurozone offers an
unprecedented experiment for this exercise: since 1999, no national
monetary policies have been implemented that could account for volatility
differences across member states, but labor market characteristics have
remained very diverse. We use a New Keynesian model with unemployment to
predict the effects of different labor market institutions on macroeconomic
volatilities. In our subsequent empirical estimations, we find that higher
labor turnover costs have a statistically significant negative effect on
output volatility, while replacement rates have a positive effect, both of
which are in line with theory. Real wage rigidities do not seem to play
much of a role. This result is in line with our employed labor market
model, but stands in stark contrast to the search and matching model. While
labor market institutions have a large effect on output volatility, they do
not seem to have much of an effect on inflation volatility. Our estimations
indicate that the latter is driven instead to a certain extent by
differences in government spending volatility
Keywords: Labor market institutions, macroeconomic volatility, monetary policy, firing costs, unemployment benefits, replacement rate; (follow links to similar papers)
JEL-Codes: E24,; E32,; J64; (follow links to similar papers)
24 pages, April 2009
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