Cyclical Inflation Divergence and Different Labor Market Institutions in the Emu

39 Pages Posted: 22 May 2006

See all articles by Alessia Campolmi

Alessia Campolmi

Universitat Pompeu Fabra

Ester Faia

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Date Written: May 2006

Abstract

This paper relates the size of the cyclical inflation differentials, currently observed for euro area countries, to the differences in labor market institutions across the same set of countries. It does that by using a DSGE model for a currency area with sticky prices and labor market frictions. We show that differences in labor market institutions account well for cyclical inflation differentials. The proposed mechanism is a supply side one in which differences in labor market institutions generate different dynamics in real wages and consequently in marginal costs and inflations. We test this mechanism in the data and find that the model replicates well the empirical facts.

Keywords: Cyclical inflation divergence, labor market institutions, EMU

JEL Classification: E52, E24

Suggested Citation

Campolmi, Alessia and Faia, Ester, Cyclical Inflation Divergence and Different Labor Market Institutions in the Emu (May 2006). ECB Working Paper No. 619, Available at SSRN: https://ssrn.com/abstract=899261

Alessia Campolmi (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Ester Faia

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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