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Publication year
Understanding the Gains from Wage Flexibility: The Exchange Rate Connection
Resource type
Authors/contributors
- Galí, Jordi (Author)
- Monacelli, Tommaso (Author)
Title
Understanding the Gains from Wage Flexibility: The Exchange Rate Connection
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, and (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.
Publication
American Economic Review
Volume
106
Issue
12
Pages
3829-68
Date
2016-12
Citation
Galí, J., & Monacelli, T. (2016). Understanding the Gains from Wage Flexibility: The Exchange Rate Connection. American Economic Review, 106, 3829–3868.
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