National prices and wage setting in a currency union

Existing work on wage bargaining (as exemplified by Cukierman and Lippi, 2001) typicallypredicts more aggressive wage setting under monetary union. This insight has not beenconfirmed by the EMU experience, which has been characterised by wage moderation,thereby eliciting criticism from Posen and Gould (2006). The present paper formulates amodel where, realistically, trade unions set wages with national prices in mind, deviatingfrom Cukierman and Lippi (2001) who postulate that wages are set having area-wide pricesin mind. For reasonable ranges of parameter values (and macroeconomic shocks), simulationsshow that a monetary union is found to elicit real wages that...

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Year of publication:	2009-05-29
Authors:	Sánchez, Marcelo
Institutions:	European Central Bank
Published in:	Working papers published in 2009 ECB Working Paper Series No 1058, May 2009
Subject:	Geldpolitik \| Gewerkschaft \| trade union \| Arbeitslosigkeit \| unemployment \| Inflation \| Währungsunion

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Abstract
Non-technical summary
1 Introduction
2 The case of national monetary policy
3 A currency union with trade unions caringabout national prices
4 The effects of unions that care aboutnational prices: Two specifi c cases
4.1 A monetary union betweenidentical countries
4.2 A monetary union between heterogeneouscountries that do not care about infl ation
5 Simulations for the general case
6 Welfare analysis
7 Conclusion
Appendix
References
Tables and fi gures
European Central Bank Working Paper Series

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