Asymmetric Labour Markets in a Converging Europe: Do Differences Matter?

In this paper we investigate whether differences we observe in European labour market transmission mechanisms matter for monetary policy design. We are particularly concerned with the robustness of the choice of rule by the European Central Bank (ECB) but we also comment on the choice of rules in the UK. Three different models of labour markets are constructed, one where the relationships are estimated separately, one where the most statistically acceptable commonalities across countries are imposed and one where common relationships are imposed across all countries. Panel estimation techniques are used to test for commonalities. These models are embedded into the National Institute’s Global Econometric Model, NiGEM, and stochastic simulations are run to evaluate different monetary policy rules.