Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area
Staff Discussion Notes, November 17, 2015
Source details
- Canonical URL
- Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area
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Bibliographic details
- Authors: Jörg Decressin, Raphael A Espinoza, Ioannis Halikias, Michael Kumhof, Daniel Leigh, Prakash Loungani, Paulo A Medas, Susanna Mursula, Antonio Spilimbergo, TengTeng Xu
- Published: November 17, 2015
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781513537009.006
Summary findings
- The paper studies the impacts of wage moderation in the euro area.
- Simulation results show that if a single euro area crisis-hit economy undertakes wage moderation, the impact on output is positive for that economy and for the entire euro area.
- If all crisis-hit economies undertake wage moderation together, their output still expands, albeit to a lesser degree.
- If the wage moderation is accompanied by cuts in policy interest rates by the central bank—and by quantitative easing once interest rates hit the zero lower bound—then output for the entire euro area expands as well.
Scenarios and simulation outcomes
- Single crisis-hit economy undertakes wage moderation:
- Output impact: positive for the undertaking economy.
- Spillovers: positive for the entire euro area.
- All crisis-hit economies undertake wage moderation together:
- Output impact: expansion for those economies, but to a lesser degree than the single-economy case.
- Wage moderation combined with accommodative monetary policy:
- Policy actions: cuts in policy interest rates; quantitative easing once interest rates hit the zero lower bound.
- Output impact: expansion for the entire euro area.
Policy implications and recommendations
- Wage moderation can raise output in crisis-hit economies and produce positive spillovers to the euro area.
- Coordination with monetary policy strengthens outcomes:
- Central bank cuts in policy interest rates support demand.
- Quantitative easing at the zero lower bound further supports euro-area output when conventional monetary policy is constrained.
Content in this bundle
- _sdn1522 — Wage Moderation in Europe