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Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy

  • Fabrizio Mattesini

    ()

    (Università di Roma 2)

  • Lorenza Rossi

    ()

    (DISCE, Università Cattolica)

In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the interest rate that supports the efficient equilibrium. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility.

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File URL: http://www.unicatt.it/Istituti/EconomiaFinanza/Quaderni/ief0072.pdf
File Function: First version, 2006
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Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Economia e Finanza with number ief0072.

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Length: nn pages 62
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:ctc:serie3:ief0072
Contact details of provider: Web page: http://www.unicatt.it/Istituti/EconomiaFinanza
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