Research Discussion Papers, Bank of Finland
Does monetary union reduce employment?
Abstract: We use a two-country monetary model with unionized labor
markets and open-economy spillovers to study the macroeconomic consequences
of the formation of a monetary union. It is shown that the monetary regime
affects the trade-off between real consumer wages and employment faced by
the unions. Consequently, the equilibrium employment is endogenous and
depends on the monetary regime. In particular, a switch from a floating
exchange rate regime to a monetary union improves employment, provided that
the degree of central bank conservatism is sufficiently high, whereas with
low degrees of conservatism employment falls. Inflation is higher in a
monetary union with all finite degrees of central bank conservatism. In
addition, we consider an asymmetric fixed exchange rate regime as an
alternative starting position for a monetary union. All results are derived
assuming that labor unions are only interested in employment and real wages
(not directly inflation) and that all structural parameters of the model
remain unchanged when a monetary union is established.
Keywords: monetary union; employment; labour unions; open-economy spillovers; central bank conservatism; (follow links to similar papers)
JEL-Codes: E52; E58; F33; J51; (follow links to similar papers)
39 pages, May 21, 2001
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