Economics at your fingertips  

Rethinking the Role of Monetary Policy and Wage Bargaining in a World Without the Real Balance Effect

Sebastian Dullien ()

European Journal of Economics and Economic Policies: Intervention, 2006, vol. 3, issue 2, 279-304

Abstract: In standard macroeconomic models (new classical, AS-AD, monopolistic competition etc.) monetary policy determines the price level. Output and employment are determined in the labour market where nominal wages are set (possibly under the influence of unions), which together with the price level yield real wages. This paper shows that including nominal wages instead of real balances in the aggregate demand function of a standard monopolistic competition model changes this conclusion completely. In a model with micro-founded investment decisions, wage setters now control the price level. Monetary policy determines output and employment. Neither actor can influence real wages and profits, which are determined by the degree of monopolisation. Further, this conclusion fits well the stylised facts of the Euro area and provides an explanation for high unemployment in Europe.

Keywords: monetary policy; wage bargaining; unemployment; heterodox economics (search for similar items in EconPapers)
JEL-codes: E52 E61 E64 (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

European Journal of Economics and Economic Policies: Intervention is currently edited by Torsten Niechoj

More articles in European Journal of Economics and Economic Policies: Intervention from Edward Elgar Publishing
Bibliographic data for series maintained by Phillip Thompson ().

Page updated 2022-10-12
Handle: RePEc:elg:ejeepi:v:3:y:2006:i:2:p:279-304