Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-26T09:18:04.977Z Has data issue: false hasContentIssue false

4 - Heterogeneous Market Regulation and Divergence in a Currency Union

from Part II - Macroeconomic Implications of Reforms

Published online by Cambridge University Press:  31 March 2020

By
Mirko Abbritti  and
Sebastian Weber
Edited by
Nauro F. Campos ,
Paul De Grauwe  and
Yuemei Ji
Nauro F. Campos
Affiliation:
University College London
Paul De Grauwe
Affiliation:
London School of Economics and Political Science
Yuemei Ji
Affiliation:
University College London
Get access

Summary

A potential driver of real income divergence across members of a currency union is their regulatory environment. We focus on the role of product and labor market regulations and assess their effects on long-term growth and on the adjustment to shocks in a two-country currency union DSGE model with endogenous growth. With endogenous growth, there is no reason to expect real income convergence. When regulation varies across countries, real income can diverge permanently, because different market regulations lead to different levels of investment in productivity enhancing technologies. This in turn causes different trend growth and inflation pressures. Furthermore, under symmetric shocks, heterogeneous regulation can cause temporary, but persistent divergence of output and inflation. The results are consistent with the disappointing productivity growth and inflation rates experienced in less reform-friendly union members in the euro area and suggest that differences in market regulation can play an important role for both long-run and short-run divergence in response to shocks.

Keywords

currency unionendogenous growthincome divergencelabor market regulationproduct market regulation
Type
Chapter
Information
Economic Growth and Structural Reforms in Europe , pp. 111 - 140
Publisher: Cambridge University Press
Print publication year: 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abbritti, M. and Fahr, S. (2013).“Downward Wage Rigidity and Business Cycle Asymmetries,” Journal of Monetary Economics, Vol. 60, No. 7, 871–886.CrossRefGoogle Scholar
Abbritti, M. and Mueller, A. I. (2013). “Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials,” Journal of Money, Credit and Banking, Vol. 45, No. 6, 1165–1186. doi:10.1111/jmcb.12048.Google Scholar
Abbritti, M. and Weber, S. (2018). “Reassessing the Role of Labour Market Institutions for the Business Cycle,” International Journal of Central Banking, Vol. 14, No. 1, 1–4.Google Scholar
Abbritti, M. and Weber, S. (2019). ‘Market Regulation, Cycles and Growth in a Monetary Union’, IMF Working Paper No. 19/123.Google Scholar
Aghion, P. , Farhi, E. and Kharroubi, E. (2018). “Monetary Policy, Product Market Competition, and Growth,” mimeo.Google Scholar
Ahn, J., Duval, R. and Sever, C. (2018). “Macroeconomic Policy, Product Market Competition and Growth: The Intangible Investment Channel,” mimeo.Google Scholar
Amable, B., Ledezma, I. and Robin, S. (2016). “Product Market Regulation, Innovation, and Productivity,” Research Policy, Vol. 45, No. 10, 2087–2104.Google Scholar
Andrés, J., Arce, O. and Thomas, C. (2017). “Structural Reforms in a Debt Overhang,” Journal of Monetary Economics, Vol. 88, No. C, 15–34.Google Scholar
Anzoategui, D., Comin, D., Gertler, M. and Martinez, J. (2018). “Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence,” American Economic Journal: Macroeconomics, Vol. 11, No. 3, 67–110. DOI: 10.1257/mac.20170269.Google Scholar
Berger, H. and Danninger, S. (2007). “The Employment Effects of Labor and Product Market Deregulation and Their Implications for Structural Reform,” IMF Staff Papers, Vol. 54, No. 3, 591–619.Google Scholar
Blanchard, O. and Gali, J. (2010). “Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment,” American Economic Journal: Macroeconomics, Vol. 2, No. 4, 1–30.Google Scholar
Brinke, A., Enderlein, H. and Fritz-Vannahme, J. (2015). What Kind of Convergence Does the Euro Area Need? Bertelsmann Stiftung und Jacques Delors Institut.Google Scholar
Cacciatore, M. and Fiori, G. (2016). “The Macroeconomic Effects of Goods and Labour Markets Deregulation,” Review of Economic Dynamics, Vol. 20, 1–24.CrossRefGoogle Scholar
Cacciatore, M., Fiori, G. and Ghironi, F. (2016). “Market Deregulation and Optimal Monetary Policy in a Monetary Union,” Journal of International Economics, Vol. 99, 120–137.CrossRefGoogle Scholar
Cameron, G., Proudman, J. and Redding, S. (2005). “Technological Convergence, R&D, Trade and Productivity Growth,” European Economic Review, Vol. 49, No. 3, 775–807.CrossRefGoogle Scholar
Cette, G., Lopez, J. and Mairesse, J. (2016). “Market Regulations, Prices, and Productivity,” American Economic Review, Vol. 106, No. 5, 104–108.Google Scholar
Ciriaci, D., Grassano, N. and Vezzani, A. (2016). “Regulation, Red Tape and Location Choices of Top R&D Investors,” European Economy – Discussion Papers 2015 – 031, European Commission.Google Scholar
Coe, D. T. and Helpman, E., (1995) “International R&D Spillovers,” European Economic Review, Vol. 39, No. 5, 859–887.Google Scholar
Comin, D. and Gertler, M. (2006). “Medium-Term Business Cycles,” American Economic Review, Vol. 96, No. 3, 523–551.CrossRefGoogle Scholar
De Grauwe, P. and Yuemei, J. (2013). “Self-Fulfilling Crises in the Eurozone: An Empirical Test,” Journal of International Money and Finance, Vol. 34, No. C, 15–36.Google Scholar
Diaz del Hoyo, J. L., Dorrucci, E., Heinzand, F. and Muzikarova, S. (2017). “Real Convergence in the Euro Area: A Long-Term Perspective,” Occasional Paper Series 203, European Central Bank.Google Scholar
Eggertsson, G., Ferrero, A. and Raffo, A, (2014). “Can Structural Reforms Help Europe?” Journal of Monetary Economics, Vol. 61, No. C, 2–22.CrossRefGoogle Scholar
Estrada, Á., Galí, J. and López-Salido, D. (2013). “Patterns of Convergence and Divergence in the Euro Area,” IMF Economic Review, Vol. 61, 601.Google Scholar
Franco, C., Pieri, F. and Venturini, F. (2016). “Product Market Regulation and Innovation Efficiency,” Journal of Productivity Analysis, Vol. 45, No. 3, 299–315.CrossRefGoogle Scholar
Franks, J., Bergljot, B., Rodolphe, B., William, O. and Hanni, S. (2018). “Economic Convergence in the Euro Area: Coming Together or Drifting Apart?” IMF Working Paper No. 18/10.Google Scholar
Griffith, R. and Macartney, G. (2014). “Employment Protection Legislation, Multinational Firms, and Innovation,” Review of Economics and Statistics, Vol. 96, No. 1, 135–150.Google Scholar
Griffith, R., Harrison, R. and Simpson, H. (2010). “Product Market Reform and Innovation in the EU,” Scandinavian Journal of Economics, Vol. 112, No. 2, 389–415.Google Scholar
Griffith, R., Redding, S. and Van Reenen, J. (2004). “Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries,” Review of Economics and Statistics, Vol. 86, No. 4, 883–895.Google Scholar
IMF (2016). “Time for a Supply-Side Boost? Macroeconomic Effects of Labour and Product Market Reforms,” World Economic Outlook, chapter 3, April.Google Scholar
Krishnamurthy, A. and Vissing-Jorgensen, A. (2012). ‘The Aggregate Demand for Treasury Debt’, Journal of Political Economy, Vol. 120, 233–267.Google Scholar
Kung, H. and Schimdt, L. (2015). “Innovation, Growth, and Asset Prices,” Journal of Finance, Vol. 70, 1001–1037.Google Scholar
Masuch, K., Moshammer, E. and Beatrice, P. (2016). “Institutions, Public Debt and Growth in Europe,” ECB Working Paper No. 1963, September 19.Google Scholar
Nickell, S. (1997). “Unemployment and Labor Market Rigidities: Europe versus North America,” Journal of Economic Perspectives, Vol. 11, No. 3, 55–74, Summer.Google Scholar
Piermartini, R. and Rubínová, S. (2014). “Knowledge Spillovers through International Supply Chains,” WTO Staff Working Papers ERSD-2014-11, World Trade Organization (WTO), Economic Research and Statistics Division.Google Scholar
Romer, P. (1990). “Endogenous Technological Change,” Journal of Political Economy, Vol. 98, No. 5, S71–102. www.jstor.org/stable/2937632.Google Scholar
Rotemberg, J. J. (1982). ‘Monopolistic Price Adjustment and Aggregate Output’, Review of Economic Studies, Vol. 49, 517–531.Google Scholar

Save book to Kindle

To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×