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Nominal Wage Flexibility and Monetary Union


  • Leichter, Jules

    () (U.S. Department of the Treasury)


The impact of the creation of a monetary union on structural convergence among member countries remains an open question. A model of monetary union is presented in which national nominal wage flexibility is endogenous and may vary across countries. We use wage indexation as a proxy for nominal wage flexibility and show how the strategic interaction between the monetary union central bank and wage bargainers results in “outlier” countries choosing an optimal wage contract which creates a more flexible nominal wage. The model predicts that if national business cycles are not perfectly synchronized, the optimal response of labor market participants to the creation of a single currency may promote structural divergence among member countries.

Suggested Citation

  • Leichter, Jules, 2004. "Nominal Wage Flexibility and Monetary Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 19, pages 113-130.
  • Handle: RePEc:ris:integr:0268

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    More about this item


    Monetary union; Wage flexibility; Structural convergence;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General


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