DP2745 Economic Performance and Stabilization Policy in a Monetary Union with Imperfect Labour and Goods Markets

Author(s): Fabrizio Coricelli , Alex Cukierman , Alberto Dalmazzo

Publication Date: March 2001

Keyword(s): Monetary Union , Central Bank Conservativeness , Shocks , Stabilization , Stabilization Policy , Wage Bargaining , Monopolistic Competition

JEL(s): E24 , E31 , E58

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2745.asp

This Paper develops a framework for the analysis of the effects of institutions on economic performance in a monetary union in the presence of stabilization policy, unionized labour markets and monopolistically competitive price setting firms. Nominal wages are fixed contractually. In spite of full price flexibility transmission of monetary policy operates via both aggregate demand and aggregate supply channels. The Paper relates average, as well as country-specific, economic performance within the monetary union, broken down to country size, number of unions, the degree of product differentiation in product markets, and central bank conservativeness. Economic performance is characterized by unemployment, inflation, real wages and competitiveness. Both average, as well as country-specific, economic performance in the presence of (possibly) heterogeneous shocks and a unified stabilization policy are evaluated.