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Monetary-Fiscal Wage Interactions in a Multi-Country Currency Union

Author

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  • Sánchez, Marcelo

    (European Central Bank)

Abstract

This paper studies a multi-country currency union of small open economies. Demand-side disturbances hamper monetary union stabilisation unless participating countries’ business cycles are perfectly synchronised. In the face of country-specific supply shocks, a currency union of small open economies underperforms monetary autonomy. Higher preference for price stability also deteriorates monetary union stabilisation performance. Monetary-fiscal interaction leads to a free rider problem, with supply shocks eliciting higher interest rate variability. Wage bargaining attempting at stabilising real wages and output mitigates the free rider problem. Decentralised wage bargaining and a lower wage sensitivity of output favour a currency union over monetary autonomy.

Suggested Citation

  • Sánchez, Marcelo, 2013. "Monetary-Fiscal Wage Interactions in a Multi-Country Currency Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 28, pages 507-524.
    • Handle: RePEc:ris:integr:0611
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    More about this item

    Keywords

    Monetary Union; Stabilisation; Welfare; Small Open Economies; Fiscal Policy; Wage Setting;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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