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Optimal Central Bank Conservatism and Monopoly Trade Unions

  • Helge Berger
  • Carsten Hefeker
  • Ronnie Schöb

OPTIMThe “conservative central banker” has come under attack recently. Explicitly modeling the interaction of a trade union with monetary policy, it has been argued that the standard solution to the inflationary bias in monetary policy might actually be welfare reducing if the trade union has an exogenously given preference against inflation. We reframe this discussion in a standard trade union model. We show that the case against the conservative central banker rests exclusively on the assumption of a strictly nominal outside option (for instance, unemployment benefits) for the union. There is no welfare gain associated with making the central bank less conservative than society, however if the outside option is in real terms. As the nominal components of the trade union’s outside option are mainly public transfers, we also show that the conservative central banker is always optimal if the government can choose the level of unemployment benefits as well as the degree of central bank conservatism.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 407.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_407
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  1. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  2. Cubitt, Robin P, 1992. "Monetary Policy Games and Private Sector Precommitment," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 513-30, July.
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  8. Lawler, Phillip, 2000. "Centralised Wage Setting, Inflation Contracts, and the Optimal Choice of Central Banker," Economic Journal, Royal Economic Society, vol. 110(463), pages 559-75, April.
  9. 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.
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  11. Lippi, Francesco, 2002. "Revisiting the case for a populist central banker," European Economic Review, Elsevier, vol. 46(3), pages 601-612, March.
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  13. David Soskice & Torben Iversen, 2000. "The Nonneutrality Of Monetary Policy With Large Price Or Wage Setters," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 265-284, February.
  14. Henrik Jensen, 1993. "International monetary policy cooperation in economies with centralized wage setting," Open Economies Review, Springer, vol. 4(3), pages 269-285, September.
  15. repec:dgr:kubcen:1998116 is not listed on IDEAS
  16. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, vol. 43(7), pages 1317-1344, June.
  17. Fischer, Stanley & Summers, Lawrence, 1993. "Should Governments Learn to Live with Inflation? Reply," American Economic Review, American Economic Association, vol. 83(1), pages 312-13, March.
  18. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September.
  19. repec:ner:tilbur:urn:nbn:nl:ui:12-82768 is not listed on IDEAS
  20. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  21. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence," Discussion Paper 1998-116, Tilburg University, Center for Economic Research.
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