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Optimal 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 a centralized wage setting (CWS) and central bank conservatism (CBC) 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. The comparison between the 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 unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a sufficiently conservative CB or with fully CWS. Conversely, when labor market distortions are less relevant, the paper shows that 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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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0014.

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Date of creation: May 2007
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Handle: RePEc:ter:wpaper:0014

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  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.
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  13. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, vol. 43(7), pages 1317-1344, June.
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  17. 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.
  18. Lars Calmfors, 2001. "Wages and Wage-Bargaining Institutions in the Emu : A Survey of the Issues," CESifo Working Paper Series 520, CESifo Group Munich.
  19. Coricelli, Fabrizio & Cukierman, Alex & Dalmazzo, Alberto, 2000. "Monetary Institutions, Monopolistic Competition, Unionized Labour Markets And Economic Performance," CEPR Discussion Papers 2407, C.E.P.R. Discussion Papers.
  20. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September.
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  22. Cubitt, Robin P, 1995. " Corporatism, Monetary Policy and Macroeconomic Performance: A Simple Game Theoretic Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 245-59, June.
  23. Coricelli, Fabrizio & Cukierman, Alex & Dalmazzo, Alberto, 2001. "Economic Performance and Stabilization Policy in a Monetary Union with Imperfect Labour and Goods Markets," CEPR Discussion Papers 2745, C.E.P.R. Discussion Papers.
  24. 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.
  25. Calmfore, L., 1993. "Centralization of Wage Bargaining and Macroeconomic Performance - A Survey," Papers 536, Stockholm - International Economic Studies.
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