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Monopolistic Unions, Brainard Uncertainty, And Optimal Monetary Policy

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  • Timo Henckel

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Abstract

Some authors have argued that multiplicative uncertainty may be beneficial to society as the cautionary move reduces the inflation bias. Contrary to this claim, I show that, when there are non-atomistic wage setters, an increase in multiplicative uncertainty rises the real wage premium and unemployment and hence may reduce welfare. Furthermore, since central bank preferences also affect real variables, delegating policy to an independent central banker with an optimal degree of conservatism cannot, in general, deliver a second-best outcome.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2006-16.

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Length: 13 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:een:camaaa:2006-16

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  1. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, Elsevier, vol. 37(4), pages 377-381, December.
  2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198284345, October.
  3. Skott, Peter, 1997. "Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy," Oxford Economic Papers, Oxford University Press, vol. 49(4), pages 609-22, October.
  4. Swank, Otto H, 1994. " Better Monetary Control May Increase the Inflationary Bias of Policy," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 96(1), pages 125-31.
  5. Lippi, F., 2000. "Strategic Monetary Policy with Non-Atomistic Wage-Setters," Papers, Banca Italia - Servizio di Studi 374, Banca Italia - Servizio di Studi.
  6. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 104(1), pages 125-45.
  7. Letterie, Wilko, 1997. " Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 99(3), pages 463-70, September.
  8. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  9. Schellekens, Philip, 2002. "Caution and Conservatism in the Making of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(1), pages 160-77, February.
  10. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 1(1), pages 59-83, February.
  11. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026203316x, December.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Cubitt, Robin P, 1992. "Monetary Policy Games and Private Sector Precommitment," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 513-30, July.
  14. Lawler, Phillip, 2002. "Monetary uncertainty, strategic wage setting and equilibrium employment," Economics Letters, Elsevier, Elsevier, vol. 77(1), pages 35-40, September.
  15. David Soskice & Torben Iversen, 2000. "The Nonneutrality Of Monetary Policy With Large Price Or Wage Setters," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 265-284, February.
  16. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, Elsevier, vol. 43(7), pages 1317-1344, June.
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