Understanding the gains from wage flexibility: The exchange rate connection

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost adjustments on employment is much smaller in a currency union, (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.

Keywords: sticky wages; nominal rigidities; New Keynesian model; stabilization policies; exchange rate policy; currency unions; monetary policy rules. (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Date: 2013-12, Revised 2016-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

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Related works:
Journal Article: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2016)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2016)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2015)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2014)
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