Nominal Wage Flexibility, Wage Indexation and Monetary Union

26 Pages Posted: 8 May 2006

See all articles by Lars Calmfors

Lars Calmfors

Research Institute of Industrial Economics; IIES

Asa Johansson

National Institute of Economic Research - NIER

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Abstract

Membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non-membership. This counteracts the stabilisation policy cost of giving up monetary independence. But more wage flexibility is only an imperfect substitute for an individual 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.

Suggested Citation

Calmfors, Lars and Johansson, Asa, Nominal Wage Flexibility, Wage Indexation and Monetary Union. Economic Journal, Vol. 116, No. 508, pp. 283-308, January 2006. Available at SSRN: https://ssrn.com/abstract=878198 or http://dx.doi.org/10.1111/j.1468-0297.2006.01057.x

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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