Structural Reform and Transparency in a Monetary Union

We assess how central bank transparency affects the incentives for labour market reform in a monetary union. We introduce transparency as affecting unemployment forecasts that provide information that the central bank has to the private sector and the governments. Under conditions of monetary policy opaqueness and inflation bias, we show that monetary union may induce more reform (as governments mitigate inflation surprises under idiosyncratic shocks), albeit to a lesser extent when inflation bias is only present at the national level. In the absence of inflation bias, central bank transparency, by eliminating inflation surprises in the face of idiosyncratic shocks, induces less reform in a currency union relative to monetary autonomy. Altogether, these results point to the need for a strong political commitment to reform so that member states benefit most from the combination of a credible and transparent single monetary policy with measures aimed at improving competitiveness and enhancing long-term growth.