The interaction between the central bank and a monopoly union revisited: does greater uncertainty about monetary policy reduce average inflation?

Luigi Bonatti ()

No 716, Department of Economics Working Papers from Department of Economics, University of Trento, Italia

Abstract: Previous papers modeling the interaction between the central bank and a monopoly union demonstrated that greater monetary policy uncertainty induces the union to reduce nominal wages. This paper shows that this result does not hold in general, since it depends on peculiar specifications of the union�s objective function. In particular, I show that greater monetary policy uncertainty raises the nominal wage whenever union members tend to be more sensitive to the risk of getting low real wages than to the risk of remaining unemployed. This conclusion appears consistent with the evidence showing that greater monetary authority�s transparency reduces average inflation.

Keywords: Monetary game; transparency in policymaking. (search for similar items in EconPapers)
JEL-codes: E31 E58 J51 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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