Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

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

Lars Calmfors () and Åsa Johansson ()
Additional contact information
Lars Calmfors: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Åsa Johansson: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

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

JEL-codes: E24; E32; F33; F41

31 pages, August 14, 2002

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