Real Wage Rigidities, Fiscal Policy, and the Stability of EMU in the Transition Phase

ByEric Thode, Norbert Berthold, Rainer Fehn

June 1, 1999

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

EMU started with eleven member countries as scheduled on January 1, 1999. The paper shows that the primacy of politics over economics in this decision could have serious consequences concerning the stability of EMU in the transition phase. Speculative attacks against currencies which are in economic distress due to asymmetric shocks can still happen. A speculative attack as such cannot force a country out of EMU. However, the country concerned might voluntarily decide to leave the system as the costs of staying inside EMU, e.g., due to further rising unemployment, become too large to bear.

Subject: Fiscal policy, Labor, Labor market reforms, Real wages, Unemployment, Wages

Keywords: asymmetric shocks, EMU country, EMU membership, Europe, European Monetary Union, fiscal policy, fiscal policy instrument, labor market reforms, large European Monetary Union, making EMU, member country, monetary base, monetary policy, real wage flexibility, real wage rigidity, Real wages, stability of EMU, unemployment, Wages, WP

Pages:
33
Volume:
1999
DOI:
https://doi.org/10.5089/9781451850529.001
Issue:
083
Series:
Working Paper No. 1999/083
Stock No:
WPIEA0831999
ISBN:
9781451850529
ISSN:
1018-5941

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