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Optimal exchange rate flexibility with large labor unions

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  • Cuciniello, Vincenzo
  • Lambertini, Luisa

Abstract

We study the optimal volatility of the exchange rate in a two-country model with sectoral non-atomistic wage setters, non-traded goods, nominal rigidities and alternative pricing assumptions – producer or local currency pricing. Labor unions internalize the sectoral impact of their wage settlements through firms' labor demand. With local currency pricing, exchange rate depreciation raises sales revenue, which in turn boosts domestic consumption and labor demand. Unions anticipate this effect and set higher wages accordingly. With small unions and low wage markup, optimal monetary policy enhances exchange rate movements to improve its terms of trade. With large unions and high wage markup, optimal monetary policy curbs exchange rate movements to restrain inflationary wage demands and to stabilize employment.

Suggested Citation

  • Cuciniello, Vincenzo & Lambertini, Luisa, 2016. "Optimal exchange rate flexibility with large labor unions," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 112-136.
    • Handle: RePEc:eee:jimfin:v:63:y:2016:i:c:p:112-136
    DOI: 10.1016/j.jimonfin.2016.01.001
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    Cited by:

    1. Andini, Corrado, 2023. "Exchange-rate policy, institutions and wages: A macroeconomic quasi-experiment from Italy, 1997–2000," International Economics, Elsevier, vol. 175(C), pages 158-170.

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    More about this item

    Keywords

    Exchange rate flexibility; Local currency pricing; Non-atomistic labor unions; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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