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Monetary Policy and Nominal Rigidities under Low Inflation

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  • Steinar Holden

Abstract

In most European countries, money wages are given in collective agreements or individual employment contracts, and the employer cannot unilaterally cut wages, even after the expiration of a collective agreement. Ceteris paribus, workers have a stronger bargaining position when they try to prevent a cut in money wages. If inflation is so low that some money wages have to be cut, workers‘ stronger bargaining position requires higher unemployment in equilibrium. However, inflation is more stable when money wage rigidity binds, providing an incentive for monetary policy makers to choose a low target for inflation, which is easier to fulfil.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-05/cesifo_wp481.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 481.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_481

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Keywords: Nominal wage rigidity; labour contracts; monetary policy; inflation; equilibrium unemployment;

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  1. Holden, Steinar, 1989. "Wage Drift and Bargaining: Evidence from Norway," Economica, London School of Economics and Political Science, vol. 56(224), pages 419-32, November.
  2. Houba, Harold & Bolt, Wilko, 2000. "Holdouts, backdating and wage negotiations," European Economic Review, Elsevier, vol. 44(9), pages 1783-1800, October.
  3. Cramton, Peter C & Tracy, Joseph S, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," American Economic Review, American Economic Association, vol. 82(1), pages 100-121, March.
  4. Steinar Holden, 2001. "Does Price Stability Exacerbate Labour Market Rigidities in the EMU?," Empirica, Springer, vol. 28(4), pages 403-418, December.
  5. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
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  7. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
  8. Ernst Fehr & Lorenz Goette, 2004. "Robustness And Real Consequences Of Nominal Wage Rigidity," Macroeconomics 0409025, EconWPA.
  9. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
  10. Holden, Steinar, 1998. " Wage Drift and the Relevance of Centralised Wage Setting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 711-31, December.
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  14. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo Group Munich.
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  17. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
  18. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
  19. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  20. Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-34.
  21. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May.
  22. Kimura, Takeshi & Ueda, Kazuo, 2001. "Downward Nominal Wage Rigidity in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 15(1), pages 50-67, March.
  23. Ernst Fehr & Lorenz Goette, 2007. "The Robustness and Real Consequences of Nominal Wage Rigidity," Kiel Working Papers 1343, Kiel Institute for the World Economy.
  24. Holden, S., 1990. "Wage Bargaining, Nominal Rigidities and Inflation," Memorandum 27/1990, Oslo University, Department of Economics.
  25. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March.
  26. Orietta DESSY, 2004. "Wage rigidity in Italy," Departmental Working Papers 2004-18, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
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Cited by:
  1. Christoph Knoppik & Thomas Beissinger, 2003. "How Rigid are Nominal Wages? Evidence and Implications for Germany," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(4), pages 619-641, December.
  2. Lundborg, Per & Sacklén, Hans, 2003. "Low-Inflation Targeting and Unemployment Persistence," Working Paper Series 188, Trade Union Institute for Economic Research.
  3. Steinar Holden, 2001. "Does Price Stability Exacerbate Labour Market Rigidities in the EMU?," Empirica, Springer, vol. 28(4), pages 403-418, December.
  4. Lundborg, Per & Sacklén, Hans, 2001. "Is There a Long Run Unemployment-Inflation Trade-off in Sweden?," Working Paper Series 173, Trade Union Institute for Economic Research.

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