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Monetary and Labor Interactions in a Monetary Union

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  • Vincenzo Cuciniello

    (Bank of Italy)

Abstract

A two-country general equilibrium model with large wage setters is developed to investigate the welfare implications of moving from a flexible exchange rate regime to a monetary union. The paper shows that the currency regime not only affects the central bank’s incentive to improve the terms of trade but also the labor unions’, generating different strategic interactions between monetary policy and wage setting. A switch from non-cooperation to monetary union does not necessarily lead to wage increases. However, a common central bank can be beneficial when a country is sufficiently open to trade, since the expected welfare gain due to the strategic effects at work more than offsets the welfare loss resulting from monetary policy’s inability to optimally stabilize the effects of asymmetric shocks.

Suggested Citation

  • Vincenzo Cuciniello, 2014. "Monetary and Labor Interactions in a Monetary Union," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 1-30, December.
    • Handle: RePEc:ijc:ijcjou:y:2014:q:4:a:1
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

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