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Monetary Policy and Nominal Rigidities under Low Inflation

  • Steinar Holden

In most European countries, money wages are given in collective agreements or individual employment contracts, and the employer cannot unilaterally cut wages, even after the expiration of a collective agreement. Ceteris paribus, workers have a stronger bargaining position when they try to prevent a cut in money wages. If inflation is so low that some money wages have to be cut, workers‘ stronger bargaining position requires higher unemployment in equilibrium. However, inflation is more stable when money wage rigidity binds, providing an incentive for monetary policy makers to choose a low target for inflation, which is easier to fulfil.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 481.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_481
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