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The Nonneutrality of Monetary Policy with Large Price or Wage Setters

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  • David Soskice
  • Torben Iversen

Abstract

Monetary rules matter for the equilibrium rate of employment when the number of price-wage setters is small, even when assuming rational expectations, complete information, central bank precommitment, and absence of nominal rigidities. If the central bank is nonaccommodating, sufficiently large unions, bargaining independently, have an incentive to moderate sectoral money wages, and thereby expected real wages. The result is an increase in the real money supply, and hence higher demand and employment. This does not hold with accommodating monetary policy since unions' wage decisions cannot then affect the real money supply. A similar argument holds for large monopolistically competitive price setters.

Suggested Citation

  • David Soskice & Torben Iversen, 2000. "The Nonneutrality of Monetary Policy with Large Price or Wage Setters," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 265-284.
    • Handle: RePEc:oup:qjecon:v:115:y:2000:i:1:p:265-284.
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    File URL: http://hdl.handle.net/10.1162/003355300554737
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