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Nominal Wage Flexibility, Wage Indexation and Monetary Union

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  • Lars Calmfors
  • Åsa Johansson
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    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.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-08/761.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 761.

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    Date of creation: 2002
    Date of revision:
    Handle: RePEc:ces:ceswps:_761

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    Related research

    Keywords: nominal wage flexibility; wage indexation; monetary union; asymmetric shocks;

    References

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    1. Fabrizio Coricelli & Alex Cukierman & Alberto Dalmazzo, 2006. "Monetary Institutions, Monopolistic Competition, Unionized Labor Markets and Economic Performance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 39-63, 03.
    2. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
    3. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    4. Maurice Obstfeld, 2003. "International Macroeconomics: Beyond the Mundell-Fleming Model," International Finance 0303006, EconWPA.
    5. James Cover & David Hoose, 2002. "Asymmetric wage indexation," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(1), pages 34-47, March.
    6. Artis, Michael J & Ehrmann, Michael, 2000. "The Exchange Rate - A Shock-Absorber or Source of Shocks? A Study of Four Open Economies," CEPR Discussion Papers 2550, C.E.P.R. Discussion Papers.
    7. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
    8. Waller, Christopher J & VanHoose, David D, 1992. "Discretionary Monetary Policy and Socially Efficient Wage Indexation," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1451-60, November.
    9. David D. VanHoose & Christopher J. Waller, 1989. "Discretion, wage indexation, and inflation," Research Working Paper 89-03, Federal Reserve Bank of Kansas City.
    10. Alun H. Thomas, 1997. "Is the Exchange Rate a Shock Absorber? the Case of Sweden," IMF Working Papers 97/176, International Monetary Fund.
    11. Gilles Saint Paul & Samuel Bentolila, 2000. "Will EMU increase eurosclerosis?," Economics Working Papers 449, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
    13. Bryson, Jay H & Chen, Chih-huan & VanHoose, David D, 1998. " Implications of Economic Interdependence for Endogenous Wage Indexation Decisions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 693-710, December.
    14. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
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    Cited by:
    1. Rodriguez-Palenzuela, Diego & Camba-Méndez, Gonzalo & García, Juan Angel, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 0278, European Central Bank.

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