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Wage-setting and inflation targets in EMU

Hancké, Bob and Soskice, David (2003) Wage-setting and inflation targets in EMU. Oxford Review of Economic Policy, 19 (1). pp. 149-160. ISSN 0266-903X

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Abstract

Although the operation of national coordinated wage-bargaining systems in EMU has produced low inflation rates, EMU-wide inflation has been above the ECB target rate for the last 3 years. By contrast, under the ERM, inflation rates declined steadily after 1992 to below 2 per cent in both the last 2 years of the regime. It is argued that this was the consequence of two low-inflation incentives under ERM: (i) the Maastricht inflation condition for EMU entry; and (ii) the combination of the Bundesbank threat to raise interest rates if German wage and price inflation rose above acceptable limits, linked to the need for other ERM members to follow low German inflation to stay within the exchange-rate bands. These incentives no longer operate under EMU, where individual economies do not have an incentive to contribute to low EMU-wide inflation. We suggest that inflation coordination between the large EMU member states might contribute to a solution while permitting the continuation of real exchange-rate adjustments of smaller economies.

Item Type: Article
Official URL: http://oxrep.oxfordjournals.org/
Additional Information: © 2003 Oxford University Press and the Oxford Review of Economic Policy Ltd
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 06 Oct 2008 15:36
URL: http://eprints.lse.ac.uk/18004/

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