Monetary Union and Pegging in the Presence of Labor Unions

Abstract

As the European Economic and Monetary Union grows, power over monetary policy is shifting away from the original founders. Previously, researchers have analyzed the impact of replacing an exchange-rate peg with a monetary union in the presence of labor unions. In these studies, the authors have consistently concluded that unemployment in the country that originally controlled monetary policy will rise, although they cite very different reasons. In this paper, we present a more general model that reproduces the previous results in special cases and clarifies the relations across the results. In addition, the more general model shows that the results are reversed in certain conditions.