Economic performance and stabilization policy in a Monetary Union with imperfect labor and goods markets

his paper develops a framework for the analysis of the effects of institutions on economic performance in a monetary union in the presence of stabilization policy, unionized labor markets and monopolistically competitive, price setting firms. Nominal wages are fixed contractually. In spite of full price flexibility transmission of monetary policy operates via both aggregate demand and aggregate supply channels. The paper relates average, as well as country specific economic performance within the monetary union to country size, number of unions, the degree of product differentiation on product markets, and central bank conservativeness. Economic performance is characterized by unemployment, inflation, real wages and competitiveness. Both average, as well as, country specific, economic performance in the presence of (possibly) heterogeneous shocks and a unified stabilization policy are evaluated.