Nominal Wage Flexibility, Wage Indexation and Monetary Union

34 Pages Posted: 21 Oct 2002

See all articles by Lars Calmfors

Lars Calmfors

Research Institute of Industrial Economics; IIES

Asa Johansson

National Institute of Economic Research - NIER

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

Membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than nonmembership. For example, entry into a monetary union may cause a move from a non-indexation to an indexation equilibrium. But more wage flexibility is only an imperfect substitute for an own monetary policy. It is possible that an increase in wage flexibility is welfare-decreasing because of the accompanying rise in price variability. The interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full-indexation equilibrium.

JEL Classification: E24, E32, F33, F41

Suggested Citation

Calmfors, Lars and Johansson, Asa, Nominal Wage Flexibility, Wage Indexation and Monetary Union (August 2002). CESifo Working Paper Series No. 761. Available at SSRN: https://ssrn.com/abstract=341381

Lars Calmfors (Contact Author)

Research Institute of Industrial Economics ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
+46761355814 (Phone)

IIES ( email )

Stockholm, SE-10691
Sweden
+468163076 (Phone)

Asa Johansson

National Institute of Economic Research - NIER ( email )

Box 3116
Stockholm, 10362
Sweden

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