Heterogeneity as Transmission: Common Shocks, Wage Regimes, Inflation  Divergence, and Policy Stance in a Two-Country  Currency Union

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Supervisors: Oikonomou, Rigas
Faculty: Faculté des sciences économiques, sociales, politiques et de communication
Degree label: Master [120] en sciences économiques, orientation économétrie, à finalité approfondie
Abstract: This study examines how differences in wage-setting institutions can transform a common shock into asymmetric national outcomes within a currency union. The mechanism operates through labour-market tightness, which determines whether newhire wages remain anchored to the existing-wage norm or shift to flexible wage pressure once a country-specific threshold is crossed. Because the selected wage enters marginal cost, this threshold generates nonlinear inflation transmission. A reducedform two-country Dynare model with an occasionally binding constraint (OccBin) compares Belgium and Germany under the same cost-push shock and common ECB interest rate while allowing their wage regimes to differ. The simulations generate distinct wage-regime paths, inflation responses, activity dynamics, and country-specific shadow-rate gaps. Reduced-form evidence from local projections and estimated tightness thresholds show corresponding differences in national inflation and real-rate responses, together with a stronger nonlinear wage–tightness relationship in Belgium. The findings identify institutional heterogeneity as an active transmission channel through which a shock that is common at impact becomes country-specific in its consequences.