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WAGE RIGIDITY AND MONETARY UNION

Harris Dellas

University of Bern, Department of Economics, CEPR and IMOP

George Tavlas

Bank of Greece, Economic Research Department

ABSTRACT

We compare monetary union to flexible exchange rates in an asymmetric, threecountry model with active monetary policy. Unlike the traditional OCA literature, we find that countries with a high degree of nominal wage rigidity benefit from monetary union, specially when they join other, similarly rigid countries. Countries with relatively more flexible wages tend to be worse off in unions with countries that have more rigid wages. We examine France, Germany and the UK and find that the welfare implications of alternative monetary arrangements depend more on the degree of wage asymmetry than on other types of asymmetries (in shocks, monetary policy etc.). And that, higher degree of wage flexibility in the UK relative to France and Germany would make its participation in EMU costly.

Keywords: Monetary union, wage rigidity, asymmetry, multi-country model

JEL classification: E4, E5, F4

The authors wish to thank Mike Wickens for numerous valuable suggestions. The views expressed are the authors’ own and should not be interpreted as those of their respective institutions

Correspondence:

George Tavlas,
Economic Research Department,
Bank of Greece, 21 E. Venizelos Av.,
102 50 Athens, Greece,
Tel. + 30 210 3202370
Fax. + 30 210 3202432
Email: gtavlas@bankofgreece.gr


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