Kiel Working Papers, Kiel Institute for World Economics
No 1490:
Unions Power, Collective Bargaining and Optimal Monetary Policy
Ester Faia and Lorenza Rossi
Abstract: We study the design of optimal monetary policy (Ramsey
policies) in a model with sticky prices and unionized labour markets.
Collective wage bargaining and unions monopoly power tend to dampen wage
fluctuations and to amplify employment fluctuations relatively to a DNK
model with walrasian labour markets. The optimal monetary policy must
trade-off counteracting forces. On the one side deviations from zero
inflation allow the policy maker to smooth inefficient employment
fluctuations. On other side, the presence of wage mark-ups and wage
stickiness produce inflationary pressures that require aggressive inflation
targeting. Overall we find that the Ramsey planner deviates from full price
stability and that an optimal rule targets inflation the real economic
activity alongside inflation
Keywords: optimal monetary policy, labour market unionization, threat points; (follow links to similar papers)
JEL-Codes: E0,; E4,; E5,; E6; (follow links to similar papers)
34 pages, March 2009
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