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Optimal monetary policy in a monetary union with non-atomistic wage setters

  • Cuciniello Vincenzo

In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that a centralized wage setting (CWS) and central bank conservatism (CBC) 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. The comparison between the national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts inflation in the absence of strategic effects. However, when strategic interactions between CB(s) and trade unions are taken into account, the shift to a MU unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a sufficiently conservative CB or with fully CWS. Conversely, when labor market distortions are less relevant, the paper shows that an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving.

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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0014.

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Date of creation: May 2007
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Handle: RePEc:ter:wpaper:0014
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  1. Skott, Peter, 1997. "Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy," Oxford Economic Papers, Oxford University Press, vol. 49(4), pages 609-22, October.
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  4. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, vol. 43(7), pages 1317-1344, June.
  5. Lippi, F., 2000. "Revisiting the Case for a Populist Central Banker," Papers 386, Banca Italia - Servizio di Studi.
  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.
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  8. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  9. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
  10. Cukierman, A. & Lippi, F., 2000. "Labor Markets and Monetary Union: a Strategic Analysis," Papers 365, Banca Italia - Servizio di Studi.
  11. Cavallari, Lilia, 2001. "Inflationary performance in a monetary union with large wage setters," ZEI Working Papers B 11-2001, ZEI - Center for European Integration Studies, University of Bonn.
  12. Piga, Gustavo, 2000. " Dependent and Accountable: Evidence from the Modern Theory of Central Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 563-95, December.
  13. 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.
  14. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
  15. Calmfore, L., 1993. "Centralization of Wage Bargaining and Macroeconomic Performance - A Survey," Papers 536, Stockholm - International Economic Studies.
  16. Cubitt, Robin P, 1995. " Corporatism, Monetary Policy and Macroeconomic Performance: A Simple Game Theoretic Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 245-59, June.
  17. 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.
  18. 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 473-91, June.
  19. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, March.
  20. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September.
  21. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
  22. 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.
  23. 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.
  24. 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.
  25. Lars Calmfors, 2001. "Wages and Wage-Bargaining Institutions in the Emu : A Survey of the Issues," CESifo Working Paper Series 520, CESifo Group Munich.
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