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Nominal Wage Flexibility, Wage Indexation and Monetary Union

  • Lars Calmfors
  • Asa Johansson

Membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non-membership. This counteracts the stabilisation policy cost of giving up monetary independence. But more wage flexibility is only an imperfect substitute for an individual 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. Copyright 2006 Royal Economic Society.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2006.01057.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 116 (2006)
Issue (Month): 508 (01)
Pages: 283-308

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Handle: RePEc:ecj:econjl:v:116:y:2006:i:508:p:283-308
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  1. Alun H. Thomas, 1997. "Is the Exchange Rate a Shock Absorber? the Case of Sweden," IMF Working Papers 97/176, International Monetary Fund.
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  8. Coricelli, Fabrizio & Cukierman, Alex & Dalmazzo, Alberto, 2000. "Monetary Institutions, Monopolistic Competition, Unionized Labour Markets And Economic Performance," CEPR Discussion Papers 2407, C.E.P.R. Discussion Papers.
  9. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  10. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
  11. 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.
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