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Optimal Central Bank Conservatism and Monopoly Trade Unions

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  • Helge Berger

    (International Monetary Fund)

  • Carsten Hefeker

    (International Monetary Fund)

  • Ronnie Schöb

    (International Monetary Fund)

Abstract

The "conservative central banker" has come under attack recently. Explicitly modeling the interaction of a trade union with monetary policy, it has been argued that the standard solution to the inflationary bias in monetary policy might actually be welfare-reducing if the trade union has an exogenous preference against inflation. We reframe this discussion in a standard trade union model. We show that the case against the conservative central banker rests on the assumption of a strictly nominal outside option (for instance, unemployment benefits) for the union. There is no welfare gain associated with making the central bank less conservative than society, however, if the outside option is in real terms. As the nominal components of the trade union's outside option are mainly public transfers, we also show that the conservative central banker is always optimal if the government can choose the level of nominal unemployment benefits as well as the degree of central bank conservatism.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 51 (2004)
Issue (Month): 3 (November)
Pages: 585-605

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Handle: RePEc:pal:imfstp:v:51:y:2004:i:3:p:585-605

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Cited by:
  1. Nicola Acocella & Giovanni Bartolomeo, 2013. "The Cost Of Social Pacts," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 65(3), pages 238-255, 07.
  2. Gruener Hans Peter & Hayo Bernd & Hefeker Carsten, 2009. "Unions, Wage Setting and Monetary Policy Uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 9(1), pages 1-25, October.
  3. Tilemahos Efthimiadis, 2004. "Does Wage Indexing Matter?," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 30, Money Macro and Finance Research Group.
  4. Lawler, Phillip, 2007. "Strategic wage setting, inflation uncertainty and optimal delegation," European Journal of Political Economy, Elsevier, Elsevier, vol. 23(4), pages 1105-1118, December.
  5. Bernd Hayo & Hans Peter Gruner & Carsten Hefeker, 2004. "Monetary policy uncertainty and unionized labour markets," Money Macro and Finance (MMF) Research Group Conference 2003, Money Macro and Finance Research Group 42, Money Macro and Finance Research Group.
  6. Robert Franzese, 2001. "Strategic Interactions of Monetary Policymakers and Wage/Price Bargainers: A Review with Implications for the European Common-Currency Area," Empirica, Springer, Springer, vol. 28(4), pages 457-486, December.
  7. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics, EconWPA 0103006, EconWPA.
  8. James McHugh, 2002. "Wage Centralization, Union Bargaining, and Macroeconomic Performance," IMF Working Papers, International Monetary Fund 02/143, International Monetary Fund.
  9. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, Elsevier, vol. 18(4), pages 653-674, November.

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