https://macropaperwarehouse.com/authors/sebastian-weber/Sebastian WeberHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/market-regulation-cycles-and-growth-dynamics-in-a-monetary-union/https://macropaperwarehouse.com/papers/market-regulation-cycles-and-growth-dynamics-in-a-monetary-union/<p>This paper develops a two-country currency union DSGE model with endogenous TFP growth and product and labor market frictions to assess how cross-country differences in market regulation affect long-run growth and business cycle dynamics. The central insight is that with endogenous growth, there is no reason to expect real income convergence within a monetary union: large shocks can lead to permanent changes in output and the real exchange rate through their effect on endogenous TFP, lifting the standard dichotomy between cycles and growth. Less regulated economies tend to have higher trend growth and recover faster from negative shocks because their institutional environment is more conducive to innovation and reallocation. Applied to the euro area financial and sovereign debt crisis, the model is consistent with the observed divergence of output and TFP paths between Northern and Southern member states, with the less reform-friendly Southern members experiencing higher inflation, lower employment, and disappointing TFP growth.</p>