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A single monetary policy for heterogeneous labour markets: the case of the euro area

Published online by Cambridge University Press:  29 May 2025

Sandra Gomes ,
Pascal Jacquinot  and
Matija Lozej
Sandra Gomes
Affiliation:
Bank of Portugal, UECE/REM - ISEG, Lisboa, Portugal
Pascal Jacquinot
Affiliation:
European Central Bank, Frankfurt, Germany
Matija Lozej*
Affiliation:
Central Bank of Ireland, Dublin, Ireland
*
Corresponding author: Matija Lozej; Email: matija.lozej@centralbank.ie
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Abstract

Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to demand and supply shocks under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with lower or higher weight on the unemployment gap. Across all rules, responding to unemployment leads to lower losses of employment. Responding to unemployment reduces cross-country differences within the monetary union and consumption inequality between rich and poor households within each country.

Keywords

DSGE modellingbusiness cyclessearch and matchingmonetary unionE24E32E43E52F45
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e111
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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