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

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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.

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  • Vincenzo Cuciniello, 2007. "Optimal monetary policy under a floating regime with non-atomistic wage setters," IHEID Working Papers 12-2007, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heiwp12-2007
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    1. Cuciniello, Vincenzo, 2007. "Strategic monetary policy in a monetary union with non-atomistic wage setters," MPRA Paper 3789, University Library of Munich, Germany, revised Jun 2007.
    2. Cuciniello Vincenzo, 2007. "Optimal monetary policy in a monetary union with non-atomistic wage setters," wp.comunite 0014, Department of Communication, University of Teramo.

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    More about this item

    Keywords

    Central bank conservatism; centralization of wage setting; inflationary bias.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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