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Optimal monetary policy under a floating regime with non-atomistic wage setters

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Abstract

In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that the monetary policies of the domestic and foreign CB are strategic complements and the presence of an inflation-averse central bank (CB) abroad always increases employment in the home country. We demonstrate that a centralized wage setting and CB conservatism curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. Finally, the welfare analysis reveals that a nationally centralized wage bargaining system always maximizes welfare if monopoly distortions in the labor market are relevant, while the appointment of a populist CB or completely decentralized wage setting is optimal when monopoly distortions are not sizeable.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 12-2007.

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Length: 35
Date of creation: 12 Mar 2007
Date of revision:
Handle: RePEc:gii:giihei:heiwp12-2007

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Keywords: Central bank conservatism; centralization of wage setting; inflationary bias.;

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  1. Francesco Lippi, 2000. "Strategic Monetary Policy with Non-Atomistic Wage-Setters," Temi di discussione (Economic working papers) 374, Bank of Italy, Economic Research and International Relations Area.
  2. Lippi, Francesco, 2002. "Revisiting the case for a populist central banker," European Economic Review, Elsevier, vol. 46(3), pages 601-612, March.
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  5. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September.
  6. Cukierman, A. & Lippi, F., 1999. "Labor markets and Monetary Union: A Strategic Analysis," Discussion Paper 1999-100, Tilburg University, Center for Economic Research.
  7. Lippi, Francesco, 1999. "Strategic Monetary Policy with Non-Atomistic Wage Setters: A Case for Non-Neutrality," CEPR Discussion Papers 2218, C.E.P.R. Discussion Papers.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, September.
  9. Nicola Acocella & Giovanni Di Bartolomeo, 2002. "Non-neutrality of monetary policy in policy games," Macroeconomics 0207002, EconWPA.
  10. 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.
  11. Lippi, Francesco, 2001. "Strategic Monetary Policy with Non-Atomistic Wage-Setters: Some Evidence," CEPR Discussion Papers 2819, C.E.P.R. Discussion Papers.
  12. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
  13. Piga, Gustavo, 2000. " Dependent and Accountable: Evidence from the Modern Theory of Central Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 563-95, December.
  14. Guzzo, Vincenzo & Velasco, Andres, 2002. "Revisiting the case for a populist central banker: A comment," European Economic Review, Elsevier, vol. 46(3), pages 613-621, March.
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Cited by:
  1. Cuciniello Vincenzo, 2007. "Optimal monetary policy in a monetary union with non-atomistic wage setters," wp.comunite 0014, Department of Communication, University of Teramo.
  2. Cuciniello, Vincenzo, 2007. "Strategic monetary policy in a monetary union with non-atomistic wage setters," MPRA Paper 3789, University Library of Munich, Germany, revised Jun 2007.

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