Register  |  Login  |  Inquiries  |  Sitemap
Advanced Search
Journal of Economic Integration 2013 September;28(3) :507-524.
Monetary-Fiscal Wage Interactions in a Multi-Country Currency Union
Marcelo Sánchez 
European Central Bank, Frankfurt, Germany
Corresponding Author: Marcelo Sánchez ,Tel: +49 6913446531, Fax: +49 6913446531, Email:
Copyright ©2013 Journal of Economic Integration
This paper studies a multi-country currency union of small open economies. Demand-side disturbances hamper monetary union stabilisation unless participating countries’ business cycles are perfectly synchronised. In the face of country-specific supply shocks, a currency union of small open economies underperforms monetary autonomy. Higher preference for price stability also deteriorates monetary union stabilisation performance. Monetary-fiscal interaction leads to a free rider problem, with supply shocks eliciting higher interest rate variability. Wage bargaining attempting at stabilising real wages and output mitigates the free rider problem. Decentralised wage bargaining and a lower wage sensitivity of output favour a currency union over monetary autonomy.

JEL Classification
E52: Monetary Policy
E58: Central Banks and Their Policies
E63: Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
F33: International Monetary Arrangements and Institutions
F42: International Policy Coordination and Transmission
Keywords: Monetary Union | Stabilisation | Welfare | Small Open Economies | Fiscal Policy | Wage Setting
1. Alesina, A., and Spolaore, E.(2003). The Size of Nations. Cambridge, MA: MIT Press.
2. Alesina, A., Spolaore, E., and Wacziarg, R.(2005). “Trade, Growth and the Size of Countries”, in Aghion, P.,and Durlauf, S. (eds.) Handbook of Economic Growth. Amsterdam: North Holland.
3. Ball, L.(1999). “Policy Rules for Open Economies”, in Taylor, J. (ed.), Monetary Policy Rules. Chicago: University of Chicago Press.
4. Ball, L.(2002). “Policy Rules and External Shocks”, in Loayza, N., Schmidt-Hebbel, K.(eds.), Monetary Policy: Rules and Transmission Mechanisms. Santiago: Central Bank of Chile.
5. Bratsiotis, G., and Martin, C.(1999). “Stabilisation,. Policy Targets and Unemployment in Imperfectly Competitive Economies”, Scandinavian Journal of Economics 101, 241-257.
6. Broadbent, B., and Barro, R.(1997). “Central Bank Preferences and Macroeconomic Equilibrium”, Journal of Monetary Economics 39, 17-43.
7. Calmfors, L., and Johansson, A.(2006). “Nominal Wage Flexibility, Wage Indexation and Monetary Union”, Economic Journal 116, 283-308.
8. Chari, V., and Kehoe, P.(2008). “Time Inconsistency and Free-Riding in a Monetary Union”, Journal of Money, Credit, and Banking 40, 1329-1356.
9. Dixit, A., and Lambertini, L.(2001). “Monetary-Fiscal Policy Interactions and Commitment versus Discretion in a Monetary Union”, European Economic Review 45, 977-987.
10. Dixit, A., and Lambertini, L.(2003). “Symbiosis of Monetary and Fiscal Policies in a Monetary Union”, Journal of International Economics 60, 235-247.
11. Erceg, C., Gust, C. and Lopez-Salido, D.(2009). “The Transmission of Domestic Shocks in Open Economies”, in Galí, J., and Gertler, M. (eds.), International Dimensions of Monetary Policy. Cambridge MA: The MIT Press.
12. Galí, J., and Monacelli, T.(2008). “Optimal Monetary and Fiscal Policy in a Currency Union”, Journal of International Economics 76, 116-132.
13. Herrendorf, B., and Lockwood, B.(1997). “Rogoff’s “Conservative” Central Banker Restored”, Journal of Money, Credit, and Banking 29, 476-495.
14. Holden, S.(2005). “Monetary Regime and the Co-ordination of Wage Setting”, European Economic Review 49, 833-843.
15. Hutchison, M., and Walsh, C.(1998). “The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand”, Economic Journal 108, 703-725.
16. OECD(2007). Economic Surveys: Euro Area. Paris: OECD.
17. Onorante, L.(2006). “Fiscal Convergence Before Entering the EMU”, ECB Working Paper No 664.
18. Oswald, A.(1985). “ The Economic Theory of Trade Unions: An Introductory Survey”, Scandinavian Journal of Economics 87, 160-193.
19. Romer, D.(1993). “Openness and Inflation: Theory and Evidence”, Quarterly Journal of Economics 108, 869-903.
20. Sánchez, M.(2006). “Is Time Ripe for a Currency Union in Emerging East Asia? The Role of Monetary Stabilisation”, Journal of Economic Integration 21, 736-763.
21. Sánchez, M.(2007a). “Monetary Stabilisation in a Currency Union: The Role of Catching up Member States”, Journal of Policy Modeling 29, 29-40.
22. Sánchez, M.(2007b). “How Does Information Affect the Comovement between Interest Rates and Exchange Rates?”, Rivista Internazionale di Scienze Sociali 4/2007, 547-562.
23. Sánchez, M.(2008a). “The Link between Interest Rates and Exchange Rates: Do Contractionary Depreciations Make a Difference?”, International Economic Journal 22, 43-61.
24. Sánchez, M.(2008b). “Monetary Stabilisation in a Currency Union of Small Open Economies”, ECB Working Paper No. 927.
25. Sánchez, M.(2008c). “Implications of Monetary Union for Catching-up Member States”, Open Economies Review 19, 371-390.
26. Svensson, L.(2000). “Open-Economy Inflation Targeting”, Journal of International Economics 50, 155-183.
27. Uhlig, H.(2003). “One Money, but Many Fiscal Policies in Europe: What are the Consequences?”, in Buti, M. (ed.), Monetary and Fiscal Policies in EMU: Interactions and Co-ordination. Cambridge: Cambridge University Press.
Editorial Office
Center for Economic Integration, Sejong Institution, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-3408-3338   E-mail :
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration. All right reserved.