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Optimal monetary policy in a monetary union with non-atomistic wage setters

Vincenzo Cuciniello

wp.comunite from Department of Communication, University of Teramo

Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that a centralized wage setting (CWS) and central bank conservatism (CBC) 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. The comparison between the national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts inflation in the absence of strategic effects. However, when strategic interactions between CB(s) and trade unions are taken into account, the shift to a MU unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a sufficiently conservative CB or with fully CWS. Conversely, when labor market distortions are less relevant, the paper shows that an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving.

New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-05
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:0014

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