Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82307
Authors: 
Andersen, Torben M.
Seneca, Martin
Year of Publication: 
2008
Series/Report no.: 
Danmarks Nationalbank Working Papers 53
Abstract: 
This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.
Subjects: 
wage formation
nominal wage rigidity
staggered contracts
monetary policy
monetary union
business cycles
shocks
JEL: 
E30
E52
F41
Document Type: 
Working Paper

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