A Macroeconometric Study on the Labor Market and Monetary Policy: Germany and the EMU

Germany will be one of the core countries in the European Monetary Union (EMU). Currently there is therefore a great interest in issues of labor market and monetary policy in Germany. On the basis of a macroeconometric model we study the interaction of labor market and alternative monetary policies using German data sets. More specifically the paper has three objectives. We first present a macroeconometric framework of disequilibrium type that is useful for empirically studying the interaction of the goods market, financial market and the labor market. Second, we estimate the model with quarterly German time series data from 1970.1 - 1991.1. Third, we evaluate the effect of different monetary policy rules and their impact on output stabilization, labor market and inflation rates, employing stochastic simulations. Two alternative monetary policy rules are considered, namely the monetary authority 1) targeting monetary aggregates or 2) targeting the interest rate. The latter rule originates in Taylor (1993) and has also been called the Taylor rule. The model is econometrically estimated through ML estimation using the similated annealing as global optimization procedure. The role of monetary policy for the labor market and inflation are studied for Germany through stochastic simulations. For the EMU such a study has particular importance since there is still a debate over monetary policy rules under the EMU and its effect on the labor market and inflation rate. We also contrast the results to studies on the US concerning labor market and monetary policy be of great interest for policy makers.