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International spill-over effects of labour market rigidities

  • Spange, Morten

This paper analyses the implications of real wage rigidities in a two-country stochastic general equilibrium model. It is shown how real wage rigidities in one country affect welfare in both countries. By assuming that the labour unions within each country decide whether wages are flexible or rigid, it is found that wages will be flexible in either none, one or both of the countries. Hence, even in a symmetric model flexible wages in one country and rigid wages in the other may be an equilibrium. Since there are international spill-over effects of the choice of wage setting regime, the utilitarian solution is also considered. Interestingly, this does not necessarily entail more real wage flexibility than in the Nash equilibrium.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 1 (March)
Pages: 157-178

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:157-178
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  2. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 0166, European Central Bank.
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  4. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  5. Erlandsson, Mattias, 2002. "Nominal Wage Flexibility in a Monetary Union," Working Papers in Economics 80, University of Gothenburg, Department of Economics.
  6. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  7. Agell, J., 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Papers 1998:17, Uppsala - Working Paper Series.
  8. Beetsma, Roel & Schotman, Peter C, 1998. "Measuring Risk Attitudes in a Natural Experiment: Data from the Television Game Show LINGO," CEPR Discussion Papers 1893, C.E.P.R. Discussion Papers.
  9. Andersen, Torben M. & Spange, Morten, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.
  10. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
  11. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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