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Influential Price and Wage Setters, Monetary Policy and Real Effects

  • George J. Bratsiotis

Using a microfounded general equilibrium model, this paper shows that when large monopolistic firms or unions perceive even a small influence on aggregate nominal variables, price targeting results in a higher equilibrium output than monetary accommodation. This is because price targeting increases, whereas monetary accommodation decreases, (i) the price elasticity of demand, (ii) the labour elasticity of demand and (iii) the elasticity of the wage with respect to the household's total income. Within this framework, we also show that (a) price targeting combined with wage centralization raise welfare, (b) the standard approximation that no single price or wage setter can affect nominal aggregates is appropriate only when (a) at least a few hundreds of such large firms exist and (b) wage centralization is low.

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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0540.

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Date of creation: 2005
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Handle: RePEc:man:sespap:0540
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  17. Knell, Markus, 2003. "Wage Formation in Open Economies and the Role of Monetary and Wage-Setting Institutions," Royal Economic Society Annual Conference 2003 124, Royal Economic Society.
  18. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1996. "On the Dixit-Stiglitz Model of Monopolistic Competition," American Economic Review, American Economic Association, vol. 86(3), pages 623-29, June.
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  20. 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.
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  23. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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