Whoís Afraid of the Big Bad Central Bank? Union-Firm-Central Bank Interactions and Inflation in a Monetary Union

Fabrizio Carmignani (f.carmignani@griffith.edu.au), Vito Muscatelli and Patrizio Tirelli

No 39, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: Existing models of union-firm-central bank interaction focus on the impact which the central bank has on union behaviour in setting wages. This paper considers an alternative explanation for wage moderation, based on firm-specific factors, whereby the probability of bankruptcy and exit disciplines firms and unions. The exit of firms is a source of employment fluctuation that the union tries to stabilize. We also show that the formation of a monetary union in this model increases the probability of firm exit and may further moderate union wage demands for any given degree of central bank conservativeness.

Date: 2002-08-29
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