Unemployment and Monetary Integration: On the relevance of wage-formation characteristics in a target-zone regime versus an irrevocably fixed exchange-rate regime

Abstract. This paper examines the relevance of wage-formation characteristics for the evolution of unemployment, comparing the current semi-fixed exchange rate system (EMS, described by a target zone regime) with an irrevocably fixed exchange-rate regime (EMU). The topic is analyzed in a model which emphasizes the working of the labour market and distinguishes between three types of shocks (a shock to money demand, goods demand and goods supply). The analysis points out that the impact of wage formation on unemployment depends crucially on the kind of shock as well as the exchange-rate regime in force.