Wage Rigidity, Monetary Integration and Fiscal Stabilization in Europe

Svend E Hougaard Jensen

Review of International Economics, 1997, vol. 5, issue 4, 36-54

Abstract: Flexibility in fiscal policy is a necessary ingredient in a policy package for EMU. Even with strong endogenous shock absorbers, such as real wage flexibility, fiscal policy can speed up the stabilization process in response to demand shocks. If real wages are rigid, as they typically are in Europe, fiscal policy cannot remove the adverse effects of asymmetric supply shocks, but it can successfully limit the divergence between member states. Monetary flexibility, a possible option in the run-up to the EMU, cannot completely make up the stabilization function of fiscal policy. Copyright 1997 by Blackwell Publishing Ltd.

Date: 1997
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