Understanding the Gains from Wage Flexibility: The Exchange Rate Connection

Jordi Galí and Tommaso Monacelli

American Economic Review, 2016, vol. 106, issue 12, 3829-68

Abstract: We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, and (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange-rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.

JEL-codes: E12 E24 E52 E63 F31 F33 F41 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20131658
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Related works:
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2016)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2015)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2014)
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