The Interaction of Monetary Policy and Wages

Thorvaldur Gylfason and Assar Lindbeck

Public Choice, 1994, vol. 79, issue 1-2, 33-46

Abstract: This paper focuses on the interaction of monetary policy and wage formation in economies with strong labor unions. Government and unions are viewed as endogenous utility maximizers and the macroeconomic consequences of their strategic interaction are explored with the aid of some elements of simple game theory. Specifically, it is shown (1) how labor unions adjust wages to prices so as to maximize their utility following changes in monetary policy; (2) how the effectiveness of monetary policy is circumscribed without necessarily being nullified by the utility-maximizing reactions of unions; and (3) how the interplay of government and unions can create a persistent tendency towards inflation and unemployment simultaneously. Copyright 1994 by Kluwer Academic Publishers

Date: 1994
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Working Paper: The Interaction of Monetary Policy and Wages (1991)
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