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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. Collard, Fabrice & Dellas, Harris, 2002. "Exchange rate systems and macroeconomic stability," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 571-599, April.
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," Working Papers 93-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 765-783, October.
  4. Maurice Obstfeld and Kenneth Rogoff., 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research (CIDER) Working Papers C01-120, University of California at Berkeley.
  5. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
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  7. Duarte, Margarida, 2003. "Why don't macroeconomic quantities respond to exchange rate variability?," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 889-913, May.
  8. Gerke, Rafael, 2001. "Nominal rigidities and the dynamic effects of a monetary shock," Publications of Darmstadt Technical University, Institute of Economics (VWL) 37702, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  9. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
  10. Dellas, Harris, 2006. "Monetary policy in open economies," European Economic Review, Elsevier, vol. 50(6), pages 1471-1486, August.
  11. 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.
  12. 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.
  13. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
  14. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  15. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  16. 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).
  17. Devereux, Michael B & Engel, Charles M, 2000. "Monetary Policy In The Open Economy Revisited: Price Setting Rules And Exchange Rate Flexibility," CEPR Discussion Papers 2454, C.E.P.R. Discussion Papers.
  18. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
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