Exchange Rate Regimes and Nominal Wage Comovements in a Dynamic Ricardian Model

We construct a dynamic Ricardian model of trade with money and nominal exchange rate. The model implies that the nominal wages of the trading countries are more likely to exhibit stronger positive comovements when the countries fix their bilateral exchange rates. Panel regression results based on data from OECD countries from 1973 to 2012 suggest that countries in the European Monetary Union (EMU) experienced stronger positive wage comovements with their main trade partners. When we restrict the regression to the subsample of the EMU countries, we find a significant increase in wage comovements after these countries joined the EMU in 1999 compared to the pre-euro era. In comparison, when the sample is restricted to the non-EMU countries, we find no evidence that non-currency union pegs affected the wage comovements.