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Monetary Policy and Staggered Wage Bargaining when Prices are Sticky

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  • Carlsson, Mikael

    ()
    (Research Department, Central Bank of Sweden)

  • Westermark, Andreas

    ()
    (Department of Economics, Uppsala University)

Abstract

In this paper, we outline a baseline DSGE model which enables a straightforward analysis of wage bargaining between firms and households/unions in a model with both staggered prices and wages. Relying on empirical evidence, we assume that prices can be changed whenever wages are changed. This feature of the model greatly reduces the complexity of the price and wage setting decisions; specifically it removes complicated interdependencies between current and future price and wage decisions. In an application of the model we study the interaction between labor-market institutions and monetary policy choices, and the consequences for welfare outcomes. Specifically, we focus on the relative bargaining power of unions. We find that, for a standard specification of the monetary policy rule, welfare is substantially affected by the degree of relative bargaining power, but that this effect can be neutralized by optimal discretionary policy.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 199.

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Length: 26 pages
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:hhs:rbnkwp:0199

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Monetary Policy; Labor Market; Bargaining;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  2. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1161-1187, September.
  3. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(5), pages 1123-1175, 09.
  4. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  5. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 117(1), pages 38-86, 02.
  6. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, Elsevier, vol. 72(2), pages 481-511, July.
  7. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  8. Carlsson Mikael & Westermark Andreas, 2008. "Monetary Policy under Downward Nominal Wage Rigidity," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 8(1), pages 1-61, October.
  9. John B. Taylor, 1998. "Staggered Price and Wage Setting in Macroeconomics," NBER Working Papers 6754, National Bureau of Economic Research, Inc.
  10. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999, Society for Computational Economics 1151, Society for Computational Economics.
  11. Carlsson, Mikael & Westermark, Andreas, 2006. "Monetary Policy and Staggered Wage Bargaining when Prices are Sticky," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 199, Sveriges Riksbank (Central Bank of Sweden).
  12. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  13. 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, University of Chicago Press, vol. 91(4), pages 589-610, August.
  14. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
  15. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  17. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  18. Gottfries, Nils & Horn, Henrik, 1987. "Wage Formation and the Persistence of Unemployment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(388), pages 877-84, December.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  20. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
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Citations

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Cited by:
  1. Sören Blomquist & Vidar Christiansen & Luca Micheletto, 2008. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," CESifo Working Paper Series 2303, CESifo Group Munich.
  2. Ohlsson, Henry, 2007. "The legacy of the Swedish gift and inheritance tax, 1884–2004," Working Paper Series, Uppsala University, Department of Economics 2007:23, Uppsala University, Department of Economics.
  3. Carlsson, Mikael & Westermark, Andreas, 2006. "Monetary Policy and Staggered Wage Bargaining when Prices are Sticky," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 199, Sveriges Riksbank (Central Bank of Sweden).
  4. Carlsson, Mikael & Westermark, Andreas, 2007. "Optimal Monetary Policy under Downward Nominal Wage Rigidity," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 206, Sveriges Riksbank (Central Bank of Sweden).
  5. Marianna Riggi, 2007. "New Keynesian models with labor market rigidities: a critical survey," Working Papers, University of Rome La Sapienza, Department of Public Economics 102, University of Rome La Sapienza, Department of Public Economics.

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