Understanding the Gains from Wage Flexibility: The Exchange Rate Connection

Jordi Galí and Tommaso Monacelli

No 22489, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.

JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-mac and nep-opm
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

Published as American Economic Review, Vol. 106, No. 12, December 2016 (pp. 3829-68)

Downloads: (external link)
http://www.nber.org/papers/w22489.pdf (application/pdf)

Related works:
Journal Article: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2016)
Working Paper: Understanding the gains from wage flexibility: The exchange rate connection (2016)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2015)
Working Paper: Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:22489

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w22489

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().