Wage Rigidity and Monetary Union

Dellas, Harris; Tavlas, George (December 2002). Wage Rigidity and Monetary Union (Diskussionsschriften 02-19). Bern: Universität Bern Volkswirtschaftliches Institut

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We compare monetary union to flexible exchange rates in an asymmetric, three-country model with active monetary policy. Unlike the traditional OCA literature, we find that countries with high nominal wage rigidities benefit from monetary union, specially when they join other, similarly rigid countries. Countries with relatively more flexible wages lose when they form a union with more rigid wage countries. We study the France, Germany and the UK and find that wage asymmetries across these three countries dominate other types of asymmetries (in shocks, monetary policy etc.) in welfare comparisons. And that, if the UK had a substantially higher degree of wage flexibility than France and Germany, then her participation in EMU would be costly.

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