Downward Wage Rigidities and Optimal Monetary Policy in a Monetary Union

29 Pages Posted: 19 Dec 2010

See all articles by Stephan Fahr

Stephan Fahr

European Central Bank

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2010

Abstract

This paper analyses the implications of heterogeneity in the type of downward wage rigidity (nominal or real) for optimal monetary policy in a monetary union with asymmetric wage adjustment costs. Indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks. Large common shocks may have sizeable and persistent effects on the intra-union terms of trade, whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness. In response to asymmetric productivity shocks, there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism.

Keywords: Grease inflation, asymmetric adjustment costs, non?linear dynamics, 24, 31, 52, 61

Suggested Citation

Fahr, Stephan Alexander and Smets, Frank, Downward Wage Rigidities and Optimal Monetary Policy in a Monetary Union (November 15, 2010). Scandinavian Journal of Economics, Vol. 112, Issue 4, pp. 812-840, 2010. Available at SSRN: https://ssrn.com/abstract=1727892 or http://dx.doi.org/10.1111/j.1467-9442.2010.01627.x

Stephan Alexander Fahr (Contact Author)

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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