Relative Prices in Monetary Union and Floating

The setting is a small open economy with an open sector and a sheltered sector. If the unions that operate in each sector coordinate their wage claims within the sector, the choice of monetary regime—monetary union or floating with an inflation target—affects the relative prices of tradables and non–tradables as well as real wages and employment. EMU membership results in lower prices of tradable goods and lower relative wages in the open sector, while opposite results hold for sheltered sector prices and wages.
JEL classification : E 5; E 24; E 42; J 5; J 31