Influential Price and Wage Setters, Monetary Policy and Real Effects

George Bratsiotis ()

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: Using a 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 households’ total real income (i.e. wage, money transfers and profits). Within this framework, price targeting is shown to reduce the macroeconomic inefficiencies associated with monopolistic competition. The paper also shows that the standard approximation, that no single price or wage setter can affect nominal aggregates, is a good approximation provided, (a) at least a few hundreds of such large firms exist and more significantly (b) labour markets are decentralized or wage centralization is very low.

Pages: 37 pages
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Influential price and wage setters, monetary policy and real effects (2008)
Working Paper: Influential Price and Wage Setters, Monetary Policy and Real Effects (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:63

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