Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 657: Macroeconomic Policy, Wage Setting and Employment - What Difference Does the EMU Make?

Lars Calmfors ()
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Lars Calmfors: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: The likely impact of the EMU on the variability and level of employment is analysed. The major conclusions are: (1) Although an inflation-target regime will constrain monetary policy of a non-participant in the EMU, it still leaves considerable scope for exchange rate chages in the case of country-specific demand-shocks, provided that there is some nominal price and wage flexibility. (2) Variations in payroll taxes can be used as a substitute for exchange rate changes in the EMU, but it will be an imperfect substitute. (3) Money-wage flexibility is likely to be larger inside than outside the EMU, but probably not by much. (4) There are various mechanisms through which the EMU may affect the incentives for labour-market reform to reduce equilibrium unemployment, but the net impact is highly uncertain.

Keywords: Monetary Union; Asymetric Shocks; Stabilisation Policy; Wage Setting; Labour-Market Reform; Equilibrium Unemployment

JEL-codes: E58; E69; F33; J29; J30

55 pages, October 1, 1998

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