Real Wage Rigidities, Fiscal Policy, and the Stability of EMU in the Transition Phase

Eric Thode, Norbert Berthold and Rainer Fehn

No 1999/083, IMF Working Papers from International Monetary Fund

Abstract: EMU started with eleven member countries as scheduled on January 1, 1999. The paper shows that the primacy of politics over economics in this decision could have serious consequences concerning the stability of EMU in the transition phase. Speculative attacks against currencies which are in economic distress due to asymmetric shocks can still happen. A speculative attack as such cannot force a country out of EMU. However, the country concerned might voluntarily decide to leave the system as the costs of staying inside EMU, e.g., due to further rising unemployment, become too large to bear.

Keywords: WP; member country; EMU membership; making EMU; EMU country; monetary base; European Monetary Union; real wage rigidity; fiscal policy; unemployment; labor market reforms; monetary policy; asymmetric shocks; real wage flexibility; stability of EMU; fiscal policy instrument; large European Monetary Union; Real wages; Wages; Europe (search for similar items in EconPapers)
Pages: 33
Date: 1999-06-01
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Citations: View citations in EconPapers (9)

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