Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy

Fabrizio Mattesini and Lorenza Rossi

No ief0072, DISCE - Quaderni dell'Istituto di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the interest rate that supports the efficient equilibrium. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility.

Keywords: Optimal Monetary Policy; Monopolist Union; Labor Indivisibility (search for similar items in EconPapers)
JEL-codes: E24 E32 E50 J23 J51 (search for similar items in EconPapers)
Pages: nn pages 62
Date: 2007-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: PRODUCTIVITY SHOCKS AND OPTIMAL MONETARY POLICY IN A UNIONIZED LABOR MARKET ECONOMY (2008)
Working Paper: Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy (2006)
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