Asymmetric Wage-Price Mechanisms and Monetary Transmission in Europe

Differences in wage-price mechanisms provide another potential source of asymmetric monetary transmission in Europe. Wage and price setting behavior represent the supply side of the European economies and determine to what extent changes in aggregate demand feed into output and prices. As a consequence of asymmetric wage-price mechanisms, the common monetary policy of the ECB might lead in some member countries to stronger output or price effects than in others. This chapter investigates whether the presence of supply side asymmetries might even lead to qualitative cyclical differences in the response to the common monetary policy.