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Barbier-Gauchard, Amélie; De Palma, Francesco; Diana, Giuseppe
Economic modelling, 12/2014, Letnik: 43Journal Article
We assume a world of two countries in a fixed exchange rate system. These countries differ in the features of their labor markets. The home country is characterized by a dual labor market, with formal and informal sectors. In the foreign country, a nominal wage rigidity exists. In this context, the situation of the labor markets in each country is not optimal owing to a misallocation of workers between sectors in the domestic economy and unemployment in the foreign economy. We show that a devaluation of domestic currency implies a fall in production in each country and deterioration of labor markets in both countries. •We consider the possibility for some countries to exit the Monetary Union.•We focus on the role of the labor market, especially when dualism exists.•Currency devaluation would have important negative effects for the overall Union.•Devaluation of domestic currency implies a fall in production in each country.•Moreover, it leads to a deterioration of labor markets in both countries.
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