Exchange Rate Regimes, Trade, and the Wage Comovements

Abstract

The introduction of exchange rate regimes into the standard Ricardian model of trade implies stronger positive nominal wage comovements between trading countries that fix their bilateral exchange rates. Panel regression results based on data from OECD countries from 1973 to 2010 suggest that countries in the European Monetary Union (EMU) experienced stronger positive wage comovements with their main trade partners. In comparison, the positive wage comovements between countries engaged in non-currency-union pegs were weaker. When we restrict the regression to the subsample of the EMU countries, we find a significant increase in wage comovements after these countries joined the EMU in 1999 compared to the pre-euro era.