Tag Archives: divergence

Conference on EMU adjustment

SWP and RGE Monitor organized a conference on adjustment and macroeconomic stability of the EMU. The papers are available for download.

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Unit labor cost growth in the Euro area: a matter of concern?

In a series of recent papers, Sebastian Dullien, Vladimir Kuzin and I analyzed the dispersion in unit labor cost growth in the Euro area in comparison with evidence for the US and West Germany. The results can be summarized as follows:

  • Deviations of ULC growth from average are more pronounced in the Euro area than elsewhere — even after introduction of the Euro.
  • Cointegration analysis reveals that we can’t reject the convergence hypothesis on reasonable significance levels, however equilibrium deviations are more pronounced and adjustment slower.
  • Panel stationarity tests (PANIC, Bai and Ng, 2002, 2004) showed a stronger diversity in the behaviour of the panel members. Idiosyncratic components are strongly autocorrelated and have a significant explanatory power for individial country’s ULC growth rates

All in all this should concern policy makers. This calls for either elimination of structural barriers for adjustment — a case we do not believe is a strong one — or a change in the policy mix to avoid long-lasting divergences with possible negative repercussions.

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