Fiscal-Monetary Policy Interactions in the Presence of Unionized Labour Markets

Alex Cukierman and Alberto Dalmazzo

No 5282, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper develops a framework for studying the interactions between labour unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labour taxes, the replacement ratio, labour market institutions and monetary policy-making institutions on economic performance in the presence of strategic interactions between labour unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labour taxes or in unemployment benefits to labours costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labour taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that higher levels of centralization and conservativeness induce government to set higher labour taxes if the replacement ratio and the tax wedge are sufficiently small.

Keywords: inflation; Redistribution; Unemployment; Competitiveness; Unemployment benefits; Central bank conservativeness; collective wage bargaining; labour taxes (search for similar items in EconPapers)
JEL-codes: E5 E6 H2 J3 J5 L1 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
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Journal Article: Fiscal-monetary policy interactions in the presence of unionized labor markets (2006)
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