CEU Electronic Theses and Dissertations, 2023
| Author | Bernardi, Marta |
|---|---|
| Title | Cost Channel and Labor Market Outcomes in the EA: a Comparison of Core and South Periphery Responses to Monetary Policy Shocks |
| Summary | This study examines the dynamic interaction between long-term interest rates and key economic variables, including RGDP, labor cost, and employment levels, within the European Monetary Union (EMU). Utilizing a Structural Vector Autoregression (SVAR) model, the analysis focuses on assessing the presence of asymmetric responses to shocks in the four variables of interest between the European core (Germany, Finland, France, and Denmark) and Southern European countries (Greece, Spain, Portugal, and Italy). The objective is to determine the extent to which these asymmetries, not adequately reflected in country-level monetary policy differences, are compensated for through adjustments in prices, real wages, or labor market quantities. The study’s findings reveal significant differences in the labor market responses to interest rate shocks. In the post-2010 period, the Southern European countries exhibit a significant negative response in employment levels lasting six quarters, indicating higher responsiveness in labor market quantities. In contrast, the European core shows no significant response, suggesting a lack of labor market quantity adjustments. Similar patterns emerge in the response of labor market prices, measured as the cost of labor. Both the Southern European countries and the European average demonstrate a negative and significant response, although the European core exhibits no significant response. These findings support the presence of higher responsiveness in labor market quantities and prices in Southern European countries, indicating a potential lack of integration in the common European labor market. Furthermore, the study suggests that the observed differences in labor market responsiveness to changes in the cost of borrowing align with the presence of a Cost channel. Fragmented economies with smaller and less capitalized firms that rely more on international external credit may experience stronger effects from changes in the cost of borrowing. Based on these findings, the study recommends policy actions that aim to increase labor market syn- chronization, thereby compensating for asymmetries within the Euro Area. Long-term solutions such as the creation of a fiscal union or the completion of the banking union could help mitigate these disparities. In the short term, targeted monetary policies and region-specific structural reforms, focused on encouraging eco- nomic diversification and promoting intra-European investment, are recommended to address the observed labor market differences. |
| Supervisor | Ratfai Attila |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2023/bernardi_marta.pdf |
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