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Rethinking the Role of Monetary Policy and Wage Bargaining in a World Without the Real Balance Effect

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  • Sebastian Dullien

    (Financial Times Deutschland)

Abstract

In standard macroeconomic models (new classical, AS-AD, monopolistic competition etc.) monetary policy determines the price level. Output and employment are determined in the labour market where nominal wages are set (possibly under the influence of unions), which together with the price level yield real wages. This paper shows that including nominal wages instead of real balances in the aggregate demand function of a standard monopolistic competition model changes this conclusion completely. In a model with micro-founded investment decisions, wage setters now control the price level. Monetary policy determines output and employment. Neither actor can influence real wages and profits, which are determined by the degree of monopolisation. Further, this conclusion fits well the stylised facts of the Euro area and provides an explanation for high unemployment in Europe.

Suggested Citation

  • Sebastian Dullien, 2006. "Rethinking the Role of Monetary Policy and Wage Bargaining in a World Without the Real Balance Effect," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 3(2), pages 279-304.
    • Handle: RePEc:elg:ejeepi:v:3:y:2006:i:2:p:279-304
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    More about this item

    Keywords

    monetary policy; wage bargaining; unemployment; heterodox economics;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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