IMF Working Papers

Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions

By Hanan Morsy, Florence Jaumotte

January 1, 2012

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Hanan Morsy, and Florence Jaumotte. Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions, (USA: International Monetary Fund, 2012) accessed December 14, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

While inflation differentials in a monetary union can be benign, reflecting a catch-up process, or an adjustment mechanism to asymmetric shocks or different business cycles, they may also indicate distortions related to inefficiencies in domestic product and labor markets that amplify or make more persistent the impact of shocks on inflation. The paper examines the determinants of inflation differentials in the euro area, with emphasis on the role of country specific labor and product market institutions. The analysis uses a traditional backward-looking Phillips curve equation and augments it to explore the role of collective bargaining systems, union density, employment protection, and product market regulation. The model is estimated over a panel dataset of 10 euro area countries over the period 1983-2007. Results show that high employment protection, intermediate coordination of collective bargaining, and high union density increase the persistence of inflation. Oil and raw materials price shocks are also more likely to be accommodated by wage increases when the degree of coordination in collective bargaining is intermediate. These results are robust to different estimation methods, model specifications, and outliers. The paper suggests that reforming labor market institutions may improve the functioning of the euro area by reducing the risk of persistent inflation differentials.

Subject: Employment protection, Inflation, Inflation persistence, Labor, Labor market institutions, Output gap, Prices, Production

Keywords: Employment protection, Euro area, Europe, High-inflation country, Inflation, Inflation differential, Inflation differentials, Inflation expectation, Inflation persistence, Labor and product market institutions, Labor market institutions, Lag inflation, Output gap, Product market institution, Regulations, WP

Publication Details

  • Pages:

    36

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2012/037

  • Stock No:

    WPIEA2012037

  • ISBN:

    9781463933807

  • ISSN:

    1018-5941