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Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment (2010)
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@MISC{Merkl10macroeconomicvolatilities,
author = {Christian Merkl and Tom Schmitz},
title = {Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment},
year = {2010}
}
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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. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.
Keyphrases
macroeconomic volatility first result euro experiment output volatility labor market different labor market institution large effect national monetary policy new keynesian model labor market institution significant negative effect subsequent empirical estimation labor turnover cost theoretical model unprecedented experiment replacement rate member state inflation volatility volatility difference labor market characteristic positive effect
