Asymmetries in housing and financial market institutions and EMU

Despite convergence pressures, differences in housing and financial market institutions across the 15 member states of the European Union are still en ormous. This paper argues that they have profound effects on the responsive ness of output and inflation in the different countries to changes in short -term interest rates, as well as to asset-market shocks of external origin. The economic reasoning behind this claim is set out and the institutional differences are described The paper assesses the sometimes conflicting empi rical evidence on this issue. Barriers to convergence and implications for labour-market flexibility are discussed. The UK, Ireland, Finland and Swede n tend to cluster at one extreme of the relevant institutional characterist ics. The paper concludes with a set of proposals for institutional reforms which would significantly reduce the tensions within EMU and the potential for instability in these economies entailed by EMU membership.