Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/28339 
Year of Publication: 
2009
Series/Report no.: 
Kiel Working Paper No. 1511
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. Real wage rigidities do not seem to play much of a role. This result is in line with our employed labor market model, but stands in stark contrast to the search and matching model. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility. Our estimations indicate that the latter is driven instead to a certain extent by differences in government spending volatility.
Subjects: 
Labor market institutions
macroeconomic volatility
monetary policy
firing costs
unemployment benefits
replacement rate
JEL: 
E24
E32
J64
Document Type: 
Working Paper

Files in This Item:
File
Size
428.02 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.