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Exchange rate regimes and wage comovements in a Ricardian model with money

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  • Kurokawa, Yoshinori
  • Pang, Jiaren
  • Tang, Yao
Abstract
We construct a Ricardian model of trade with money and trade costs. The model predicts that the nominal wages of the trading countries exhibit stronger positive comovements when the countries fix their bilateral exchange rates, while comovements of real wages are not affected by exchange rate regimes. Our numerical experiments suggest that a reduction in trade costs increases both nominal and real wage comovements, regardless of regimes. When downward nominal wage rigidity is introduced, nominal wage comovements under the fixed regime remain stronger than under the flexible regime and the difference is smaller on the shorter time horizon, while a slight difference in real wage comovements between the two regimes shows up and is larger on the shorter time horizon. When we consider membership in the Economic and Monetary Union of the European Union as a fixed exchange rate regime, panel regression results based on data from OECD countries are broadly consistent with our model and numerical experiments.

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  • Kurokawa, Yoshinori & Pang, Jiaren & Tang, Yao, 2016. "Exchange rate regimes and wage comovements in a Ricardian model with money," Journal of International Economics, Elsevier, vol. 102(C), pages 96-109.
    • Handle: RePEc:eee:inecon:v:102:y:2016:i:c:p:96-109
    DOI: 10.1016/j.jinteco.2016.06.002
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    Cited by:

    1. Kurokawa, Yoshinori & Pang, Jiaren & Tang, Yao, 2016. "Exchange rate regimes and wage comovements in a Ricardian model with money," Journal of International Economics, Elsevier, vol. 102(C), pages 96-109.
    2. Crucini, Mario J. & Yilmazkuday, Hakan, 2014. "Understanding long-run price dispersion," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 226-240.

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    More about this item

    Keywords

    Ricardian model; Fixed exchange rate regime; Currency union; Trade; Wage comovements;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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