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Union Power, Collective Bargaining, And Optimal Monetary Policy

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  • ESTER FAIA
  • LORENZA ROSSI

Abstract

We study the design of optimal monetary policy (Ramsey policies) in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power tend to dampen wage fluctuations and to amplify employment fluctuations relatively to a DNK model with walrasian labour markets. The optimal monetary policy must trade-off counteracting forces. On the one side deviations from zero inflation allow the policy maker to smooth inefficient employment fluctuations. On other side, the presence of wage mark-ups and wage stickiness produce inflationary pressures that require aggressive inflation targeting. Overall we find that the Ramsey planner deviates from full price stability and that an optimal rule targets inflation the real economic activity alongside inflation

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File URL: http://hdl.handle.net/10.1111/j.1465-7295.2012.00461.x
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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 51 (2013)
Issue (Month): 1 (01)
Pages: 408-427

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Handle: RePEc:bla:ecinqu:v:51:y:2013:i:1:p:408-427
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Find related papers by JEL classification:
  • E0 - Macroeconomics and Monetary Economics - - General
  • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
  • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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Cited by:

  1. Janett Neugebauer & Dennis Wesselbaum, 2010. "Staggered Wages, Sticky Prices, and Labor Market Dynamics in Matching Models," Kiel Working Papers 1608, Kiel Institute for the World Economy.
  2. Carlsson, Mikael & Westermark, Andreas, 2012. "Labor-Market Frictions and Optimal Inflation," Working Paper Series 259, Sveriges Riksbank (Central Bank of Sweden).
  3. Andrea Colciago & Lorenza Rossi, 2013. "Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income," DNB Working Papers 367, Netherlands Central Bank, Research Department.

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