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Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment

Author(s): Pietro Biroli (University of Chicago), Gilles Mourre, (European Commission and Université libre de Bruxelles), Alessandro Turrini (European Commission)

Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessmentpdf(671 kB) Choose translations of the previous link 

Summary for non-specialistspdf(92 kB) Choose translations of the previous link 

This paper assesses the adjustment mechanism in the euro area. Results show that the real exchange rate (REER) adjusts in such a way to redress cyclical divergences and that after monetary unification REER dynamics have become less reactive to country-specific shocks but also less persistent. It is found that regulations, notably affecting price and wage nominal flexibility and employment protection, play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter for both the reaction of price competitiveness to cyclical divergences (differences between national and euro-area output gaps) and for the inertia of competitiveness indicators. Moreover, regulations appear to matter also for the extent to which common shocks may end up producing country-specific effects on the price competitiveness, as revealed by their interaction with proxies of unobservable common shocks along the lines of the methodology developed in Blanchard and Wolfers (2000). In light of the tendency towards less stringent regulations in past decades, the results seem consistent with the observed reduction in the persistence of inflation differentials, and has have implications for the design of adjustment-friendly product and labour market reforms.

(European Economy. Economic Papers 428. October 2010. Brussels. PDF. 29pp. Tab. Graph. Bibliogr. Free.)

KC-AI-10-428-EN-N (online)
ISBN 9978-92-79-14914-6 (online)
ISSN 1725-3187 (online)
doi: 10.2765/44864 (online)

JEL classification: E30, F41

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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