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

Author/Editor:

Eric Thode ; Norbert Berthold ; Rainer Fehn

Publication Date:

June 1, 1999

Electronic Access:

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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.

Series:

Working Paper No. 1999/083

Subject:

Fiscal policy Labor Labor market reforms Real wages Unemployment Wages

English

Publication Date:

June 1, 1999

ISBN/ISSN:

9781451850529/1018-5941

Stock No:

WPIEA0831999

Pages:

33

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