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Wage Rigidity and Monetary Union

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  • Harris Dellas
  • George Tavlas

Abstract

We compare monetary union to flexible exchange rates in an asymmetric, three-country model with active monetary policy. We find that countries with a high degree of nominal wage rigidity benefit from monetary union, especially when they join other, similarly rigid countries. Countries with relatively more flexible wages tend to be worse off in unions with countries that have more rigid wages. We examine France, Germany and the UK and find that the welfare implications of monetary arrangements depend more on the degree of wage asymmetry than on other types of asymmetries and that the higher wage flexibility in the UK would make its participation in EMU costly. Copyright 2005 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 115 (2005)
Issue (Month): 506 (October)
Pages: 907-927

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Handle: RePEc:ecj:econjl:v:115:y:2005:i:506:p:907-927

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Michael B. Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility," NBER Working Papers 7665, National Bureau of Economic Research, Inc.
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  7. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
  8. Dellas, Harris, 2006. "Monetary policy in open economies," European Economic Review, Elsevier, vol. 50(6), pages 1471-1486, August.
  9. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?," NBER Working Papers 8765, National Bureau of Economic Research, Inc.
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  13. Collard, Fabrice & Dellas, Harris, 2002. "Exchange rate systems and macroeconomic stability," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 571-599, April.
  14. Hughes Hallett, Andrew & Jensen, Svend E. Hougaard, 2001. "Currency unions and the incentive to reform: are market mechanisms enough?," The North American Journal of Economics and Finance, Elsevier, vol. 12(2), pages 139-155, July.
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  16. George S. Tavlas, 1993. "The ‘New’ Theory of Optimum Currency Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 663-685, November.
  17. Gerke, Rafael, 2001. "Nominal rigidities and the dynamic effects of a monetary shock," Darmstadt Discussion Papers in Economics 37702, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
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