Scandinavian Working Papers in Economics
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Institute for International Economic Studies, Stockholm University Seminar Papers, Institute for International Economic Studies, Stockholm University

No 716:
Nominal Wage Flexibility, Wage Indexation and Monetary Union

Lars Calmfors () and Åsa Johansson ()

Abstract: Membership in a monetary union (EMU) is likely to imply stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non-membership. For example, EMU entry may cause a move from a nonindexation to an indexation equilibrium. But more wage flexibility is only an imperfect substitute for an own monetary policy. It is possible that an increase in wage flexibility is welfare-decreasing, because of the accompanying rise in price variability. If indexation occurs outside the EMU, either multiple equilibria or full-indexation equilibria may occur.

Keywords: nominal wage flexibility; wage indexation; EMU; asymmetric shocks; (follow links to similar papers)

JEL-Codes: E24; E32; F33; F41; (follow links to similar papers)

31 pages, August 14, 2002

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