Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets

A. Belke, D. Gros

    Research output: Working paperDiscussion paperOther research output

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    Abstract

    Discussions of the economic costs and benefits of EMU usually take as their basis the optimum currency area (OCA) approach. This approach starts from the premise that when an external shock hits the economy, it is easier to adjust the exchange rate than domestic prices or wages. Most economists accept the general idea behind this approach, namely that nominal wages are usually sticky in the shortrun and that it is therefore easier to adjust to external shocks and obtain changes in the real exchange rate or the terms of trade through a movement in the exchange rate. But there is little agreement on how important these "external" shocks are in reality. We try to measure the importance of external shocks for (un)employment. We find that external shocks have little impact on unemployment, but are more important in the evolution of employment in manufacturing. The results differ, however, strongly from country to country and for about half of EU member countries we did not find any significant relationship. Taking into account various potential shock absorbers (exchange rate movements, fiscal and monetary policy) does not affect the results. We conclude that the loss of the exchange rate instrument will not lead to massive unemployment problems.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherMacroeconomics
    Number of pages46
    Volume1997-95
    Publication statusPublished - 1997

    Publication series

    NameCentER Discussion Paper
    Volume1997-95

    Fingerprint

    Costs and benefits
    External shocks
    Labour market
    Exchange rates
    Unemployment
    Wages
    Manufacturing
    Economic cost
    Terms of trade
    Economic benefits
    Optimum currency area
    Real exchange rate
    Fiscal and monetary policy
    Economists

    Keywords

    • exchange rates
    • export demand
    • external shocks
    • optimal currency area
    • (un)employment

    Cite this

    Belke, A., & Gros, D. (1997). Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets. (CentER Discussion Paper; Vol. 1997-95). Tilburg: Macroeconomics.
    Belke, A. ; Gros, D. / Estimating the Costs and Benefits of EMU : The Impact of External Shocks on Labour Markets. Tilburg : Macroeconomics, 1997. (CentER Discussion Paper).
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    Belke, A & Gros, D 1997 'Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets' CentER Discussion Paper, vol. 1997-95, Macroeconomics, Tilburg.

    Estimating the Costs and Benefits of EMU : The Impact of External Shocks on Labour Markets. / Belke, A.; Gros, D.

    Tilburg : Macroeconomics, 1997. (CentER Discussion Paper; Vol. 1997-95).

    Research output: Working paperDiscussion paperOther research output

    TY - UNPB

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    AU - Belke, A.

    AU - Gros, D.

    N1 - Pagination: 46

    PY - 1997

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    AB - Discussions of the economic costs and benefits of EMU usually take as their basis the optimum currency area (OCA) approach. This approach starts from the premise that when an external shock hits the economy, it is easier to adjust the exchange rate than domestic prices or wages. Most economists accept the general idea behind this approach, namely that nominal wages are usually sticky in the shortrun and that it is therefore easier to adjust to external shocks and obtain changes in the real exchange rate or the terms of trade through a movement in the exchange rate. But there is little agreement on how important these "external" shocks are in reality. We try to measure the importance of external shocks for (un)employment. We find that external shocks have little impact on unemployment, but are more important in the evolution of employment in manufacturing. The results differ, however, strongly from country to country and for about half of EU member countries we did not find any significant relationship. Taking into account various potential shock absorbers (exchange rate movements, fiscal and monetary policy) does not affect the results. We conclude that the loss of the exchange rate instrument will not lead to massive unemployment problems.

    KW - exchange rates

    KW - export demand

    KW - external shocks

    KW - optimal currency area

    KW - (un)employment

    M3 - Discussion paper

    VL - 1997-95

    T3 - CentER Discussion Paper

    BT - Estimating the Costs and Benefits of EMU

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    ER -

    Belke A, Gros D. Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets. Tilburg: Macroeconomics. 1997. (CentER Discussion Paper).