Title:
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Understanding the gains from wage flexibility: the exchange rate connection
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Author:
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Galí, Jordi, 1961-; Monacelli, Tommaso
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Abstract:
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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. |
Abstract:
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We thank the Fondation Banque de France for financial support. |
Rights:
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© American Economic Association. Can be found at http://dx.doi.org/10.1257/aer.20131658 |
Document type:
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Article Article - Published version |
Published by:
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American Economic Association
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