Nominal Wage Flexibility, Wage Indexation and Monetary Union
34 Pages Posted: 21 Oct 2002
Date Written: August 2002
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: Suggested Citation