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Exchange Rate Regimes and Wage Comovements in a Ricardian Model with Money

Yoshinori Kurokawa (), Jiaren Pang () and Yao Tang ()

Tsukuba Economics Working Papers from Faculty of Humanities and Social Sciences, University of Tsukuba

Abstract: We construct a Ricardian model of trade with money and trade costs. The model predicts that the nominal wages of the trading countries exhibit stronger positive comovements when the countries fix their bilateral exchange rates, while comovements of real wages are not affected by exchange rate regimes. Our numerical experiments suggest that a reduction in trade costs increases both nominal and real wage comovements, regardless of regimes. When downward nominal wage rigidity is introduced, nominal wage comovements under the fixed regime remain stronger than under the flexible regime and the difference is smaller on the shorter time horizon, while a slight difference in real wage comovements between the two regimes shows up and is larger on the shorter time horizon. When we consider membership in the Economic and Monetary Union of the European Union as a fixed exchange rate regime, panel regression results based on data from OECD countries are broadly consistent with our model and numerical experiments.

Date: 2013-11, Revised 2016-07
New Economics Papers: this item is included in nep-eec and nep-mon
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Related works:
Journal Article: Exchange rate regimes and wage comovements in a Ricardian model with money (2016) Downloads
Working Paper: Exchange Rate Regimes, Trade, and the Wage Comovements (2011) Downloads
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