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Exchange Rate Regimes and Wage Comovements in a Ricardian Model with Money

Listed author(s):
  • Yoshinori Kurokawa
  • Jiaren Pang
  • Yao Tang

We construct a Ricardian model of trade with money and trade costs. The model predicts that the nominal wages of the trading countries exhibit stronger positive comovements when the countries fix their bilateral exchange rates, while comovements of real wages are not affected by exchange rate regimes. Our numerical experiments suggest that a reduction in trade costs increases both nominal and real wage comovements, regardless of regimes. When downward nominal wage rigidity is introduced, nominal wage comovements under the fixed regime remain stronger than under the flexible regime and the difference is smaller on the shorter time horizon, while a slight difference in real wage comovements between the two regimes shows up and is larger on the shorter time horizon. When we consider membership in the Economic and Monetary Union of the European Union as a fixed exchange rate regime, panel regression results based on data from OECD countries are broadly consistent with our model and numerical experiments.

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File URL: http://www.econ.tsukuba.ac.jp/RePEc/2013-005.pdf
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Paper provided by Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba in its series Tsukuba Economics Working Papers with number 2013-005.

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Date of creation: Nov 2013
Date of revision: Jul 2016
Handle: RePEc:tsu:tewpjp:2013-005
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1-1-1 Tennodai, Tsukuba, Ibaraki 305-8571

Web page: http://www.econ.tsukuba.ac.jp/

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