WAGE FLEXIBILITY AND MACROECONOMIC STABILITY - AN ANALYSIS OF THE LONG-RUN PROPERTIES OF THE DANISH QUARTERLY MACROECONOMETRIC MODEL, MONA

This article investigates the long-run properties of the quarterly mac roeconometric model, Mona, with particular emphasis on the role of wag e flexibility for macroeconomic stability. In contradiction of traditi onal macroeconomic orthodoxy, it is shown that enhanced wage flexibili ty may tend to increase instability in the dynamic adjustment process. Higher wage and price increases improve the terms-of-trade, and hence real incomes, which gives rise to consumption and investment growth. This expansive and destabilising effect will more or less offset crowd ing out through foreign trade, and the road to equilibrium may be long and cyclical. Wealth effects via the housing market make the consumpt ion ratio pro-cyclical and add to the destabilising mechanism.