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Optimal monetary policy under a floating regime with non-atomistic wage setters



In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that the monetary policies of the domestic and foreign CB are strategic complements and the presence of an inflation-averse central bank (CB) abroad always increases employment in the home country. We demonstrate that a centralized wage setting and CB conservatism curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. Finally, the welfare analysis reveals that a nationally centralized wage bargaining system always maximizes welfare if monopoly distortions in the labor market are relevant, while the appointment of a populist CB or completely decentralized wage setting is optimal when monopoly distortions are not sizeable.

Suggested Citation

  • Vincenzo Cuciniello, 2007. "Optimal monetary policy under a floating regime with non-atomistic wage setters," IHEID Working Papers 12-2007, Economics Section, The Graduate Institute of International Studies.
  • Handle: RePEc:gii:giihei:heiwp12-2007

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    References listed on IDEAS

    1. Francesco Lippi, 2003. "Strategic Monetary Policy with Non-Atomistic Wage Setters," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 909-919.
    2. Piga, Gustavo, 2000. " Dependent and Accountable: Evidence from the Modern Theory of Central Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 563-595, December.
    3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    4. Cukierman, Alex & Lippi, Francesco, 2001. "Labour Markets and Monetary Union: A Strategic Analysis," Economic Journal, Royal Economic Society, vol. 111(473), pages 541-565, July.
    5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, June.
    6. Guzzo, Vincenzo & Velasco, Andres, 2002. "Revisiting the case for a populist central banker: A comment," European Economic Review, Elsevier, vol. 46(3), pages 613-621, March.
    7. Acocella, Nicola & Di Bartolomeo, Giovanni, 2004. "Non-neutrality of monetary policy in policy games," European Journal of Political Economy, Elsevier, vol. 20(3), pages 695-707, September.
    8. Lippi, Francesco, 2002. "Revisiting the case for a populist central banker," European Economic Review, Elsevier, vol. 46(3), pages 601-612, March.
    9. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
    10. Skott, Peter, 1997. "Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy," Oxford Economic Papers, Oxford University Press, vol. 49(4), pages 609-622, October.
    11. Lippi, Francesco, 2001. "Strategic Monetary Policy with Non-Atomistic Wage-Setters: Some Evidence," CEPR Discussion Papers 2819, C.E.P.R. Discussion Papers.
    12. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-595, September.
    13. 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 473-491, June.
    14. Lippi, Francesco, 1999. "Strategic Monetary Policy with Non-Atomistic Wage Setters: A Case for Non-Neutrality," CEPR Discussion Papers 2218, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Cuciniello Vincenzo, 2007. "Optimal monetary policy in a monetary union with non-atomistic wage setters," wp.comunite 0014, Department of Communication, University of Teramo.
    2. Cuciniello, Vincenzo, 2007. "Strategic monetary policy in a monetary union with non-atomistic wage setters," MPRA Paper 3789, University Library of Munich, Germany, revised Jun 2007.

    More about this item


    Central bank conservatism; centralization of wage setting; inflationary bias.;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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