Monetary-Fiscal Wage Interactions in a Multi-Country Currency Union

Sánchez, Marcelo

doi:2013.28.3.507

The Journal of Economic Integration 2013 September;28(3) :507-524.
DOI: https://doi.org/10.11130/jei.2013.28.3.507

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: marcelo.sanchez@ecb.int

ABSTRACT

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

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