Market Regulation, Cycles and Growth in a Monetary Union

June 3, 2019

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Format: Chicago

Mirko Abbritti, and Sebastian Weber. Market Regulation, Cycles and Growth in a Monetary Union, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members.

Subject: Commodity markets, Financial markets, Inflation, Labor, Labor markets, National accounts, Prices, Production, Return on investment, Total factor productivity

Keywords: Business cycle, Commodity markets, Currency union, Endogenous growth, Inflation, Labor and product market regulation, Labor market, Labor markets, Northern Europe, Product market regulation, R&D investment, Return on investment, Risk premium shock, Southern Europe, TFP dynamics, Total factor productivity, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/123
Stock No:

WPIEA2019123
ISBN:

9781498311489
ISSN:

1018-5941

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