Nominal Wage Flexibility in a Monetary Union
AbstractMembership in a monetary union reduces the possibilities to counteract fluctuations in productivity by monetary policy. One condition for entrance not to lead to adverse unemployment performance is that wages are flexible with respect to productivity. Here I show that, depending on workers’ risk aversion, the incentive for workers to choose more nominal wages flexibility may increase after entrance in a monetary union. The reason is that if nominal wages are fixed in long-term contracts, the abolishment of exchange rates decreases the risk in real wages. On the other hand, the common monetary policy increases the employment risk. Assuming that individuals’ preferences do not change, the institutional change in monetary policy may increase wage flexibility in a monetary union.
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Bibliographic InfoPaper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 80.
Length: 37 pages
Date of creation: 23 Sep 2002
Date of revision:
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Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
More information through EDIRC
New open-economy macroeconomics; Nominal wage flexibility; Optimal wage setting; Monetary unification;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
This paper has been announced in the following NEP Reports:
- NEP-EEC-2002-10-18 (European Economics)
- NEP-IFN-2002-10-18 (International Finance)
- NEP-LAB-2002-10-18 (Labour Economics)
- NEP-LTV-2002-09-21 (Unemployment, Inequality & Poverty)
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