Kayam, Saime S. (2011): Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus.
Download (750kB) | Preview
In this paper, I consider two heterogeneous economies that engage in a currency union. The small economy adopts the currency of the large and is highly dependent on its wealthier partner for trade. The effects of a currency union, deficit financing and institutional restraints on inflation are analyzed in a dual economy with different wage-setting mechanisms. In the model, Northern Cyprus is the small economy and Turkey, being the only country that acknowledges it as an independent state is its larger partner. Features of the labour markets determine the wages. We make a conjecture that wage determination in Northern Cyprus (NC) is conducted with reference to centralized-bargaining and that decentralized bargaining sets the wages in Turkey (TR). Hence, the differences in wage-setting procedures cause a dual labour market. In order to incorporate monetary dependence into the analysis, we let the Turkish central bank to decide on the economic policy measures, in this case the inflation rate and unemployment. The institutional restraints such as economic sanctions increase the inflexibility in the NC and cause shocks to affect the economy more. In order to compensate for the losses that might be endured by the government in NC, TR finances the budget deficit of NC. Therefore, TR government needs to consider the burden of this financing issue.
|Item Type:||MPRA Paper|
|Original Title:||Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus|
|English Title:||Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus|
|Keywords:||currency union, monetary policy, labour market institutions, politics|
|Subjects:||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy
F - International Economics > F1 - Trade > F15 - Economic Integration
F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms
|Depositing User:||Saime Kayam|
|Date Deposited:||31 May 2012 12:57|
|Last Modified:||29 Mar 2017 15:29|
Alesina, A. and R. J. Barro (2002) Currency unions, Quarterly Journal of Economics, 117: 409-436.
Armstrong, H. W. and R. Read (1998) Trade and growth in small states: The impact of global trade liberalization, World Economy, 21: 563-585.
Calmfors, L. (2001) Wages and wage-bargaining institutions in the EMU-A survey of the issues, Empirica, 28: 325-351.
Chipman, J. S. and J. C. Moore (1980) Compensating variation, consumer’s surplus, and welfare, American Economic Review, 70:5, 933-949.
Driffill, J. and F. Van der Ploeg (1993) Monopoly unions and the liberalisation of international trade, Economic Journal, 103: 379-385.
Duarte, M. And A. L. Wolman (2003) Fiscal policy and regional inflation in a currency union, Federal Reserve Bank of Richmond Working Paper No. 03-11.
Fields, G. (2007) Dual economy, Cornell University IRL Working Papers, [31.07.2009], http://digitalcommons.ilr.cornell.edu/working papers/17.
Frankel, J. and A. Rose (2002) An estimate of the effect of common currency on trade and income, Quarterly Journal of Economics, 117: 437-466.
Glyfason, T. and A. Lindbeck (1994) The interaction of monetary policy and wages, Public Choice, 79: 33-46.
Gregoriadis, N., C. Semenescu and P. Villieu (2006) Monetary policy and inflation divergences in a heterogeneous monetary union, The 55th Annual Congress of the French Association of Economic Science 14-15, 2006, Paris.
Grüner, H. P. And C. Hefeker (1999) How will EMU affect inflation and unemployment in Europe?, Scandinavian Journal of Economics, 101: 33-47.
Holden, S. (2005) Monetary regimes and the co-ordination of wage setting, European Economic Review, 49: 833-843.
Huizinga, H. (1993) International market Integration and union-wage bargaining, Scandinavian Journal of Economics, 95: 249-255.
Iversen, T. (1998) Wage bargaining, hard money and economic performance: Theory and evidence for organized market economies, British Journal of Political Science, 28: 31-61.
Johansson, P. (1991) An introduction to modern welfare economics, Cambridge: Cambridge University Press.
Manning, A. (1987) An integration of trade union models in a sequential bargaining framework, Economic Journal, 97: 121-139.
Mundell, R. A. (1961) A theory of optimum currency areas, American Economic Review, 51: 657-665.
Peters, T. (1995) European Monetary Union and labour markets: What to expect?, International Labour Review, 134: 315-332.
Svensson, L. O. (1993) Fixed exchange rates as a means to price stability: What have we learned?, NBER Working Paper No.4504.
Vousden, N. (1990) The economics of trade protection, Cambridge: Cambridge University Press.
Willig, R. (1976) Consumer’s surplus without apology, American Economic Review, 66:4, 598-597.
Witter, M., L. Briguglio, and A. Bhuglah (2002) Measuring and managing the economic vulnerability of small island developing states, New York: UNDP.