Exchange rate interventions in centralized labor markets

The ability to engineer real wage cuts in centralized labor markets has depended on exchange rate interventions. This paper provides some structure to the question of how a monetary union would a¤ect the connection between bargaining structure and macroeconomic performance. The results indicate that the precautionary saving motive in anticipation of transitory terms of trade shock is signi...cantly reduced if an implicit contract is in place ensuring labor market clearing at all times. Thus, a pro-cyclical volatility is created in private consumption as well as real exchange rates. This hints that a monetary union membership, might endogenously change the real wage dynamics in centralized labor markets and the pending problem of cyclical unemployment in EMU currency area is therefore over-estimated. JEL classi...cation: E21, J51, F33, F41