How Will EMU Affect Inflation and Unemployment in Europe?

This paper explores how European Monetary Union will change the wage setting behavior of national labor unions. We derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements. A common central bank raises inflation and unemployment if it acts as conservatively as national central banks. However, unemployment falls in countries that previously tied their monetary policy to the Bundesbank. We also examine the composition of EMU and the influence of national labor market legislation.
JEL Classification : E 24; F 02; F 33     

Trend inflation as a workers’ discipline device

The paper shows that a monetary policy regime that allows for a positive inflation rate disciplines monopolistic wages setters if these, when setting contracts, internalize the consequences of their choices for economic outcomes over the life of the contract. We also show that discretionary monetary policy has real effects when wage setters are non atomistic, whereas commitment to a positive inflation rate is effective irrespective of the degree of labor market centralization. Finally, the model may explain the different unemployment dynamics in Europe and in the United States, following the 1980 disinflationary episode. Our approach suggests that disinflation induced an adverse effect on the labor market wedge and that such effect was stronger in Europe, due to the particular importance of large wage setters.     

Robust central banking under wage bargaining: Is monetary policy transparency beneficial?

We study the role of transparency in an environment of robust monetary policy under wage bargaining. The standard view from the game-theoretical literature is that, with unionised labour markets, monetary policy transparency is unambiguously “bad” (it induces increases in wage and price inflation, unemployment and may lead to higher inflation uncertainty). The empirical literature is instead ambiguous about the macroeconomic effects of transparency. By recasting the earlier theory into a robust monetary policy environment, and focusing transparency on the uncertainty about the preference for price stability, we show that the macroeconomic effects of transparency are more favourable than normally found. The impact on nominal wages, inflation and real variables (real wages and unemployment) is not parameter-free but depends on the public's informedness about this coefficient. The impact on real variables is found to disappear in case unions do not internalise the effect of wage decisions on the economy (i.e. in the case of atomistic unions). Finally, we find that the effect of transparency on inflation uncertainty is more complex than in the standard approach. We show that transparency may have the beneficial effect of reducing inflation variability not only when monetary uncertainty is low (as previously reported), but also when monetary uncertainty exceeds an upper threshold.     

Monetary Institutions,Monopolistic Competition,Unionized Labor Markets and Economic Performance*

Recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy, but not both. This leads to two opposing views about the effects of central bank conservativeness. We evaluate the relative merits of those conflicting views by developing a unified framework. We find that: (i) the effect of conservativeness on employment depends on unions’ relative aversion to unemployment versus inflation, and (ii) for plausible values of this relative aversion (and more than one union), social welfare is maximized under a highly conservative central bank. We also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation.     

Unemployment and International Factor Movement in the Presence of Skilled and Unskilled Labor

Widespread unemployment has been observed in some developing countries. On the other hand, extensive movement of labor across countries has also been observed. Therefore, in order to examine the interaction between the domestic and international labor markets, this paper develops a model that includes unemployment, international factor movement, and the difference between skilled and unskilled labor. The model examines the effect of production subsidies on unemployment and evaluates their effectiveness as a possible policy in order to alleviate the problem of unemployment. Further, this paper investigates the effects of international factor movement on unemployment and welfare.     

Inflation and Unemployment in General Equilibrium*

When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed, as in Rogerson (1988) . We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets, as in Lagos and Wright (2005) . This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show that the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips curve provides a long‐run, exploitable, trade‐off for monetary policy; it turns out, however, that the optimal policy is the Friedman rule.     

Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?

As the US labor market has tightened beyond full employment with relatively little evidence of inflation pressure, observers are increasingly inclined to declare the demise of the Phillips curve, that is, the flattening of its slope to zero. This paper reviews a substantial range of empirical evidence on this point, by assessing the performance of the conventional expectations-augmented Phillips curve for both prices and wages, based on both historical macro or national level data and panel data for states and MSAs (cities). National data going back to the 1950s and 60s yield strong evidence of negative slopes and significant nonlinearity in those slopes, with slopes much steeper in tight labor markets than in easy labor markets. This evidence of both slope and nonlinearity weakens dramatically based on macro data since the 1980s for the price Phillips curve, but not the wage Phillips curve. However, the endogeneity of monetary policy and the lack of variation of the unemployment gap, which has few episodes of being substantially below zero in this sample period, makes the price Phillips curve estimates from this period less reliable. At the same time, state level and MSA level data since the 1980s yield significant evidence of both negative slope and nonlinearity in the Phillips curve. The difference between national and city/state results in recent decades can be explained by the success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s. We also review the experience of the 1960s, the last time inflation expectations became unanchored, and observe both parallels and differences with today. Our analysis suggests that reports of the death of the Phillips curve may be greatly exaggerated.     

Monetary Policy Games and International Migration in a Small Open Economy

The paper shows that international migration may improve the position of both policymakers and unions in small open economies irrespective of whether they cooperate or not. This result implies that both unions and policymakers in small open economies may welcome a further increase in international labor flow in the future. When allowance is made for real GDP per capital considerations on behalf of the policymaker, it is found that aggressive union behavior may increase the inflationary bias. Aggressive unions may insulate themselves, while soft unions lose. The presence of migration does not necessarily lead to a better outcome.     

How Far Should Mr Keating Go?

Australia's current account deficit is large by historical standards and so is the boom in private investment spending. The net effect is a level of thrift that is not unusually low. A major uncertainty facing policymakers is how far unemployment can be reduced without causing an inflationary spiral. If unemployment can be reduced without igniting inflation, then there is a case for loosening monetary policy.     

Stabilisation, Policy Targets and Unemployment in Imperfectly Competitive Economies

This paper argues that the rate of equilibrium unemployment depends on the objectives of the Central Bank. In a model where the Central Bank uses monetary policy to stabilise the economy, we show that unemployment and inflation will be lower with an inflation target than with targets for output, money or nominal GDP. The intuition for this is that the elasticities of demand in both the product and the labour markets are greater when there is an inflation target; we show that this leads to a lower mark-up of price over marginal cost and makes wages more sensitive to unemployment.     

Further evidence on alternative theories of inflation and unemployment:the Scandination countries

The objective of this study is to estimate the inflation and unemployment models of various of macroeconomics as suggested by Sargent, Stein and Rea, and to test the validity of their propositions using the data of four Scandinavian countries, namely Denmark, Finland Norway and Sweden. The results provide some support for the new classical models on unemployment, but the monetory variables, as monetarists argue, have a significant effect on unemployment. With regard to inflation, the data of the Scandinavian countries do not support the monetarist proposition that inflation is always and everywhere a monetary phenomenon. However, the results support Keynesian propositions that economic slack represented by unemployment is important in explaining the rate of inflation.     

Monetary Union Enlargement,Fiscal Policy,and Strategic Wage Setting*

This contribution develops a framework for studying the effects of the enlargement of a monetary union on macroeconomic performances in the presence of strategic interactions between non‐atomistic labor unions, monetary, and fiscal authorities. We show that the integration of new identical member countries may have beneficial effects, depending on the fiscal policymaking structure. Qualifications to this result are provided under cross‐country asymmetries in the size of the economies, the structure of the labor markets, and the fiscal authorities' preferences.     

The role of labor markets for euro area monetary policy

In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.     

Occupational choice and development

The rise in world trade since 1970 has been accompanied by a rise in the geographic span of control of management and, hence, also a rise in the effective international mobility of labor services. We study the effect of such a globalization of the world?s labor markets. The world?s welfare gains depend positively on the skill-heterogeneity of the world?s labor force. We find that when people can choose between wage work and managerial work, the worldwide labor market raises output by more in the rich and the poor countries, and by less in the middle-income countries. This is because the middle-income countries experience the smallest change in the factor-price ratio, and where the option to choose between wage work and managerial work has the least value in the integrated economy. Our theory also establishes that after economic integration, the high skill countries see a disproportionate increase in managerial occupations. Using aggregate data on GDP, openness and occupations from 115 countries, we find evidence for these patterns of occupational choice.     

A model of relative national price levels under pricing to market

This paper proposes an alternative to the Balassa-Samuelson theory of how relative price levels between countries are determined. The theory is a general equilibrium formulation of a model where pricing to market arises endogenously from firm decisions. It differs from Balassa-Samuelson in that it centers on the distinction between segmented national goods markets rather than the distinction between traded and nontraded goods. The paper also explores how Balassa-Samuelson might be updated by combining it together with pricing to market elements. Applied to the case of a monetary union, the theory offers an alternative explanation for the inflation differentials observed in EMU. It implies that such differentials may be a natural and enduring feature of a monetary union in which markets for goods and labor are less than fully integrated.     

Transparency and central bank losses in developing countries

Recent evidence shows central banks suffering from losses in some developing countries. This is a surprise to economists and policymakers. At the same time, these banks are asked to conduct monetary policy within a more transparent framework. Therefore, this paper seeks to answer the following question: Would more transparency in developing countries suffering from central bank losses be beneficial?This paper shows that the cost constraints of conducting monetary policy, central bank losses, in both transparency and opacity alike is significant and affects positively the error of the private sector in expected inflation rate and the output gap. In a country suffering from central bank losses, the expected benefits of transparency and the existence of cost constraint move in two opposite directions. As a result, it is unwise for developing countries suffering from central bank losses to focus on transparency. Priority should be given to fixing monetary policy and to developing financial markets.     

Imperfect Labor Mobility and Unemployment in a Dual Economy*

This paper examines the implications of imperfect labor mobility and unemployment in developing countries. We analyze the effects of wage subsidy policies, factor growth, and the change in labor mobility on unemployment and national income in an economy that is characterized by the existence of both imperfect labor mobility and urban unemployment.     

Banking crises,labor reforms,and unemployment

Using a sample of 97 countries spanning the period 1980–2008, we estimate that banking crises have, on average, a large negative impact on unemployment. This effect, however, largely depends on the flexibility of labor market institutions: while in countries with more flexible labor markets the impact of banking crises is sharper but short-lived, in countries with more rigid labor markets the effect is initially more subdued but highly persistent. These effects are even larger for youth unemployment in the short term, and long-term unemployment in the medium term. Conversely, large upfront, or gradual but significant, comprehensive market reforms have a positive impact on unemployment, albeit only in the medium term.     

美联储量化宽松政策对全球资产价格的非平衡溢出效应

本文采用全局向量自回归模型分析了美联储QE对采用不同货币政策框架、汇率制度和资本流动管理制度国家和地区的不同影响。“货币政策钉住货币供应量+宽松钉住汇率制度+资本账户可兑换”的国家其货币政策应兼顾本国物价水平稳定，同时加强宏观审慎政策对资产价格的逆周期调节，避免出现实体经济紧缩而金融繁荣的现象。“货币政策钉住通货膨胀+浮动汇率+资本账户可兑换”的国家应强化宏观审慎政策对资产价格的调节以应对金融资产泡沫。     

Progressive taxation and human capital as determinants of inflation persistence

In this study, we introduce progressive taxation and human capital differences across productive sectors into a typical monetary policy game. The objective of this work is to reveal the potential short-run effects of these two typical features of economic growth on inflation dynamics. In our framework, such features act as frictions of labor mobility across sectors. We show that an increased progressivity of taxation lowers the diffusion of shocks, and in turn increases inflation persistence. Moreover, the dispersion of human capital across sectors acts as a barrier to labor mobility and thereby increasing inflation inertia through the same channel. We also empirically verify these findings by employing panel data analysis in a sample of 28 OECD countries.