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Fiscal-Monetary Policy Interactions in the Presence of Unionized Labour Markets

Listed author(s):
  • Cukierman, Alex
  • Dalmazzo, Alberto

This paper develops a framework for studying the interactions between labour unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labour taxes, the replacement ratio, labour market institutions and monetary policy-making institutions on economic performance in the presence of strategic interactions between labour unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labour taxes or in unemployment benefits to labours costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labour taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that higher levels of centralization and conservativeness induce government to set higher labour taxes if the replacement ratio and the tax wedge are sufficiently small.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5282.

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Date of creation: Oct 2005
Handle: RePEc:cpr:ceprdp:5282
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  12. Fabrizio Coricelli & Alex Cukierman & Alberto Dalmazzo, 2006. "Monetary Institutions, Monopolistic Competition, Unionized Labor Markets and Economic Performance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 39-63, 03.
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  21. Aucremanne, Luc & Dhyne, Emmanuel, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Working Paper Series 0331, European Central Bank.
  22. Cukierman, A. & Lippi, F., 2000. "Labor Markets and Monetary Union: a Strategic Analysis," Papers 365, Banca Italia - Servizio di Studi.
  23. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
  24. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  25. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
  26. 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.
  27. David Soskice & Torben Iversen, 2000. "The Nonneutrality of Monetary Policy with Large Price or Wage Setters," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 265-284.
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