Stabilization Policy in a Currency Area and the Impact of Wage Rigidities / Stabilisierungspolitik in einer Wechselkursunion und die Bedeutung von Lohnrigiditäten

Daseking Christina
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Daseking Christina: International Monetary Fund, 700 19th Street, N.W, Washington, D.C. 20431, U.S.A.

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 1996, vol. 215, issue 2, 171-187

Abstract: The effects of stabilization policy and the impact of wage rigidities are analyzed for a small two-country currency area under the assumption of completely symmetrical demand sides and perfect capital mobility. It is shown that a different degree of wage rigidity within the area has a strong impact on the domestic income response to monetary and fiscal policy measures. While a country whose real wages are comparatively rigid benefits from a nominal appreciation of the joint exchange rate, accompanying a fiscal expansion, a country with a lower degree of real wage rigidity has an incentive to stimulate the domestic economy through a policy of nominal depreciation, such as a monetary expansion. Since both policy actions imply beggar-my-neighbor effects, different wage rigidities express an important reason for conflicts within a currency area and may eventually lead to its break-up.

Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:215:y:1996:i:2:p:171-187

DOI: 10.1515/jbnst-1996-0205

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