Understanding the Gains from Wage Flexibility: The Exchange Rate Connection

Galí, Jordi and Tommaso Monacelli
Authors registered in the RePEc Author Service: Jordi Galí

No 9806, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the gains from increased wage flexibility and their dependence on exchange rate policy, using a small open economy model with staggered price and wage setting. Two results stand out: (i) the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate, and (ii) an increase in wage flexibility often reduces welfare, and more likely in economies under an exchange rate peg or an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.

Keywords: Currency unions; Exchange rate policy; Exchange rate regime; Monetary policy rules.; New keynesian model; Nominal rigidities; Stabilization policies; Stabilization policy; Sticky wages (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2016)
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 (2016)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2015)
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