Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment

30 Pages Posted: 14 Nov 2010

See all articles by Pietro Biroli

Pietro Biroli

University of Zurich - Department of Economics

Gilles Mourre

European Union - European Commission

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Date Written: September 2010

Abstract

This paper analyses the adjustment mechanism in the euro area. Results show that the real exchange rate (REER) adjusts in such a way to redress cyclical divergences and that after monetary unification REER dynamics have become less reactive to country-specific shocks but also less persistent. It is found that regulations, notably affecting price and wage nominal flexibility and employment protection, play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter for both the reaction of price competitiveness to cyclical divergences (differences between national and euro-area output gaps) and for the inertia of competitiveness indicators. Moreover, regulations appear to matter also for the extent to which common shocks may have country-specific effects on price competitiveness, as revealed by their interaction with proxies of unobservable common shocks á-la Blanchard and Wolfers (2000). In light of the tendency towards less stringent regulations in past decades, the results seem consistent with the observed reduction in the persistence of inflation differentials, and have implications for the design of adjustment-friendly product and labour market reforms.

Keywords: competitiveness, euro area adjustment, labour and product market institutions, monetary unification, nominal flexibility, regulations

JEL Classification: E30, F41

Suggested Citation

Biroli, Pietro and Mourre, Gilles and Turrini, Alessandro, Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment (September 2010). CEPR Discussion Paper No. DP8010, Available at SSRN: https://ssrn.com/abstract=1707900

Pietro Biroli (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

Gilles Mourre

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Alessandro Turrini

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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