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



where sr is the impact effect (elasticity) of ωon inflation when the nominal wages of other
unions are taken as given in a monetary regime
r [Æ, U]:

w    1

ɑ7)^нн (1 7)aP-FH] (0> 1)


(31)


Sn ≡ —— = — [«7 + (1
i   n

u     7 r,               ,                                 z

su ≡ ~1   =    [(1 a)μu + «] 7)                    (32)

i   пн

with ι∣∣∣∣ (^FH ) representing the reduced form elasticity of Home (Foreign) money supply
to Home aggregate wages under a NMP regime, while
Mu is the elasticity of union-wide
money supply to union-wide wages under a MU regime21,
εr is the elasticity of labor
demand to the nominal wage of union
г in the monetary regime r:

dlN   A Mo s 1

εN J = σ ( 1      ) + (1 MhH)    )                 (33)

i    П nH J           пн

εu ~tl = 7σ f1--^ + (1 Mu) ɪ-                (34)

i П nH J          пн

Note that equation (33) and (34) are a weighted average of the elasticity of substitu-

tion among labor types and the elasticity of aggregate labor demand, Dividing (30) by
— sr, we can express the first order condition in terms of the real wage elasticity
of labor demand,
ηr, as follows22

d log Wi,l.
d^i


«(1 ηr ) + r Ii = 0.

(35)


Equation (35) shows that an increase in the union t’s wages has two opposing effects on
the utility of workers, On one hand it increases the real wage and reduces employment;
since the latter effect is larger, there is a reduction in consumption (the first term in
(35)), On the other hand, a wage rise increases utility through leisure (the second term in
(35)), Thus, each union sets a nominal wage growth according to her consumption∕leisure
preferences,
k,

Under a NMP regime the elasticity of domestic labor demand (in absolute value) is
given by
where
вн 1 «7 and Θf 1 (1 7)«,

ηN(*)


εN

1 sN


_______1 — Mcc + (nc Aσ_______
nC 1 + M1 kcc) + (1 9-c}μ-cc


(36)


Similarly we may derive the labor demand elasticity in the Home and Foreign country

21See Appendix for details,

22Derivation in Appendix,

13



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