Heterogenous Wage Formation Under a Common Monetary Policy

43 Pages Posted: 9 Jul 2004

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: June 2004

Abstract

How does a monetary union work when labour markets are heterogeneous? Since shocks are transmitted via both trade links and the common monetary policy and propagated via labour market responses, it follows that labour market institutions may have not only national but also union-wide implications. These issues are analysed in an intertemporal general equilibrium model for a currency union in which labour markets are heterogenous and where the monetary policy targets expected inflation. More flexibility in adjustment means more stable aggregate output, but inflation control becomes more difficult. Heterogeneity in adjustment plays a large role, in particular if country sizes are also asymmetric. This also holds in the case of aggregate shocks both for the variability of aggregate output and inflation. Considering the effects on country specific output variability, it is seen that there are important spillover effects between labour market structures, and that it is not necessarily beneficial to make a unilateral move to make labour markets more flexible.

Keywords: Wage formation, monetary policy, monetary union, business cycles, shocks

JEL Classification: E30, E52, F41

Suggested Citation

Andersen, Torben M., Heterogenous Wage Formation Under a Common Monetary Policy (June 2004). Available at SSRN: https://ssrn.com/abstract=563283

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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