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Optimal monetary policy under a floating regime with non-atomistic wage setters

Vincenzo Cuciniello

No 12-2007, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that the monetary policies of the domestic and foreign CB are strategic complements and the presence of an inflation-averse central bank (CB) abroad always increases employment in the home country. We demonstrate that a centralized wage setting and CB conservatism curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. Finally, the welfare analysis reveals that a nationally centralized wage bargaining system always maximizes welfare if monopoly distortions in the labor market are relevant, while the appointment of a populist CB or completely decentralized wage setting is optimal when monopoly distortions are not sizeable.

Keywords: Central bank conservatism; centralization of wage setting; inflationary bias. (search for similar items in EconPapers)
JEL-codes: E2 E42 E5 F31 F41 (search for similar items in EconPapers)
Pages: 35
Date: 2007-03-12
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
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