Ragnar Nymoen. Published in Metroeconomica (2026): Read-only version
Summary:
The article gives the institutional set-up whereby Norway has combined pattern wage bargaining (where the manufacturing sector leads) with a floating exchange rate and inflation targeting.
Critics have argued this could lead to over-determined or unstable wage-price dynamics.
The paper explores this using a realistically calibrated dynamic simulation model.
Baseline scenario: Nominal exchange rate follows a random walk, wages and prices fluctuate around steady-state growth rates. System remains stable.
Structural break scenario: Exchange rate becomes linked to domestic inflation. This raises the steady-state inflation rate and can, in some calibrations, produce explosive or unstable dynamics.
Key insight: Pattern wage bargaining is not inherently inconsistent with inflation targeting. Dynamic adjustment—rather than static assumptions—ensures stability most of the time. However, instability may arise when inflation feedback to the exchange rate is too strong.
Implications: Dynamic theoretical and empirical modelling of pattern wage bargaining is required for relevant representations of wage-price spirals. Operationally, awareness studies and monitoring structural changes in exchange rate behaviour are critical, especially in small open economies with active wage-setting institutions