We extend irrelevance results of sticky prices and fixed exchange rates to environments with sticky wages. Provided payroll taxes can be used with the same flexibility as monetary policy, then sticky wages are irrelevant for both optimal allocations and policies in response to shocks. This is the case also under fixed exchange rates or in a monetary union.
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The assumption of two countries is for simplicity only.
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Adao, B., Correia, I. & Teles, P. Wage and Price Rigidity in a Monetary Union. Open Econ Rev 21, 109–126 (2010). https://doi.org/10.1007/s11079-009-9156-2
- Monetary union
- Fixed exchange rates
- Fiscal and monetary policy
- Stabilization policy
- Sticky prices
- Sticky wages