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Unions Power, Collective Bargaining and Optimal Monetary Policy

  • Ester Faia

    ()

    (Department of Money and Macro, Goethe University Frankfurt)

  • Lorenza Rossi

    ()

    (Department of Economics and Quantitative Methods, University of Pavia)

We study Ramsey policies and optimal monetary policy rules in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power dampen wage fluctuations and amplify employment fluctuations relatively to a DNK model. The optimal monetary policy must trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions' monopoly power. In this context the monetary authority uses inflation as a tax on unions' rents. The optimal monetary policy rule targets unemployment alongside inflation.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q126.pdf
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Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 126.

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Length: 32 pages
Date of creation: Oct 2010
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Handle: RePEc:pav:wpaper:126
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