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Wage-Setting and Inflation Targets in EMU

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  • Bob HanckÈ
  • David Soskice
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    Abstract

    Although the operation of national coordinated wage-bargaining systems in EMU has produced low inflation rates, EMU-wide inflation has been above the ECB target rate for the last 3 years. By contrast, under the ERM, inflation rates declined steadily after 1992 to below 2 per cent in both the last 2 years of the regime. It is argued that this was the consequence of two low-inflation incentives under ERM: (i) the Maastricht inflation condition for EMU entry; and (ii) the combination of the Bundesbank threat to raise interest rates if German wage and price inflation rose above acceptable limits, linked to the need for other ERM members to follow low German inflation to stay within the exchange-rate bands. These incentives no longer operate under EMU, where individual economies do not have an incentive to contribute to low EMU-wide inflation. We suggest that inflation coordination between the large EMU member states might contribute to a solution while permitting the continuation of real exchange-rate adjustments of smaller economies. Copyright 2003, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

    Volume (Year): 19 (2003)
    Issue (Month): 1 ()
    Pages: 149-160

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    Handle: RePEc:oup:oxford:v:19:y:2003:i:1:p:149-160

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    Web page: http://oxrep.oupjournals.org/

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    Cited by:
    1. Truger, Achim & Hein, Eckhard, 2004. "Macroeconomic co-ordination as an economic policy concept : opportunities and obstacles in the EMU," WSI Discussion Papers 125, Wirtschafts- und Sozialwissenschaftliches Institut (WSI), Hans-Böckler-Stiftung.
    2. Höpner, Martin & Schäfer, Armin (ed.), 2008. "Die Politische Ökonomie der europäischen Integration," Schriften aus dem Max-Planck-Institut für Gesellschaftsforschung Köln, Max Planck Institute for the Study of Societies, volume 61, number 61.
    3. Alfonso Arpaia & Karl Pichelmann, 2007. "Nominal and real wage flexibility in EMU," International Economics and Economic Policy, Springer, vol. 4(3), pages 299-328, November.
    4. Alison Johnston, 2011. "The revenge of Baumol's cost disease?: monetary union and the rise of public sector wage inflation," LSE Research Online Documents on Economics 53280, London School of Economics and Political Science, LSE Library.
    5. Horst Siebert, 2004. "Germany in the European Union: Economic Policy under Ceded Sovereignty," Kiel Working Papers 1217, Kiel Institute for the World Economy.
    6. Alison Johnston, 2011. "The Revenge of Baumol's Cost Disease?: Monetary Union and the Rise of Public Sector Wage Inflation," LEQS – LSE 'Europe in Question' Discussion Paper Series 32, European Institute, LSE.

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