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

under a MU regime as follows

It is worth noticing that when unions internalize the impact of their wages on the CB
reaction abroad, Mph, such variable increases the elasticity of labor demand²³. Intuitively,
an increase in Home wages boosts the price of the Home-produced good. The Foreign
country undergoes an imported inflation since it consumes the Home good as well. Thus,
the Foreign CB is induced to counteract the inflationary wage settlement with a restrictive
monetary policy so as to keep current account balance and consumption constant across
the two countries (see equation (Il)).

In the next section we will see how employment and inflation are determined by macro-
economic institutional variables that affect the labor demand elasticity. In doing that we
will assume that the CBC is not affected by the monetary regime, i.e. βu = M_h ⁼ β.

7 Equilibrium employment and inflation

Since unions are identical, in a symmetric equilibrium lj = I for all г = 1, ...,пн we can
derive employment from equation (35) as follows:

a /     1 ∖        ч

^lr = к (^{1 -} ηj ∈^(0,1).

Equation (38) points out that equilibrium employment is an increasing function of the
elasticity of labor demand, η_r. When the elasticity of labor is finite (η_r < ∞) unions
have some market power²⁴. The smaller is the labor elasticity, the higher is the unions’
incentive to raise her nominal wages. In fact, a nominal wage claim sends ripples through
employment to a less extent in presence of market power²⁵. By contrast, when the elasticity
of labor demand goes to infinity we achieve the competitive (optimal) level of employment
g
к .

The area-wide price level is calculated by plugging equation (38) into the CB reaction
function (28). Assuming a symmetric equilibrium, we obtain the inflation rate in the two
regimes as follows

■■ = ɪʌʒ(ɪ + !-U )              (39)

M^{1 - a}7⁾ ∖ηw   ηN J

²³The elasticities of money supply with respect to nominal wages abroad, μ~_cc, are always negative
(Cuciniello, 2007).

²⁴As in Kydland and Prescott (1977) and Barro and Gordon (1983), equilibrium employment is at
suboptimal level.

²⁵The monopolistic nature of the labor market and the effects on employment are in accord with Blan-
chard and Kiyotaki (1987) results.

14

<<   12   13   14   15   16   17   18   >>

More intriguing information