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Nominal Wage Flexibility, Wage Indexation and Monetary Union

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  • Lars Calmfors
  • Åsa Johansson

Abstract

Membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than nonmembership. For example, entry into a monetary union may cause a move from a non-indexation to an indexation equilibrium. But more wage flexibility is only an imperfect substitute for an own monetary policy. It is possible that an increase in wage flexibility is welfare-decreasing because of the accompanying rise in price variability. The interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full-indexation equilibrium.

Suggested Citation

  • Lars Calmfors & Åsa Johansson, 2002. "Nominal Wage Flexibility, Wage Indexation and Monetary Union," CESifo Working Paper Series 761, CESifo.
    • Handle: RePEc:ces:ceswps:_761
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    References listed on IDEAS

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    More about this item

    Keywords

    nominal wage flexibility; wage indexation; monetary union; asymmetric shocks;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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