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Strategic monetary policy in a monetary union with non-atomistic wage setters

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  • Cuciniello, Vincenzo

Abstract

In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that more centralized wage setting (CWS) and central bank conservatism (CBC) curb unemployment only if labor market distortions are sizeable. When labor market distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. The comparison between a national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts inflation in the absence of strategic effects. However, when strategic interactions between CB(s) and trade unions are taken into account, the shift to a MU when monopoly distortions are sizeable unambiguously increases welfare and employment either in presence of a sufficiently conservative CB or with a fully CWS. Finally, when labor market distortions are less relevant, an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3789.

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Date of creation: Apr 2007
Date of revision: Jun 2007
Handle: RePEc:pra:mprapa:3789

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

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  1. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Lippi, F., 2000. "Revisiting the Case for a Populist Central Banker," Papers 386, Banca Italia - Servizio di Studi.
  3. Francesco Lippi, 2000. "Strategic Monetary Policy with Non Atomistic Wage Setters," Econometric Society World Congress 2000 Contributed Papers 1354, Econometric Society.
  4. Cavallari, Lilia, 2001. "Inflationary performance in a monetary union with large wage setters," ZEI Working Papers B 11-2001, ZEI - Center for European Integration Studies, University of Bonn.
  5. Giovanni Di Bartolomeo & Nicola Acocella, 2005. "Non-Neutrality Of Monetary Policy In Policy Games," Macroeconomics 0504026, EconWPA.
  6. 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.
  7. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
  8. 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.
  9. 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.
  10. Vincenzo Cuciniello, 2007. "Optimal monetary policy under a floating regime with non-atomistic wage setters," IHEID Working Papers 12-2007, Economics Section, The Graduate Institute of International Studies.
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