Remark 4 (i) In the case of an ultra-populist CB, when β = O, the labor demand elasticity
under a NMP regime, gN, and the labor demand elasticity in a MU, ηu, coincide and are
equal to σ; (ii) in the case of an ultra-conservative CB, when β → ∞, the labor demand
elasticity under a NMP regime, η^, is always smaller than the labor demand elasticity in
a MU.
According to Remark 4, if a CB does not care about inflation before and after a move
to MU, the regime shift does not have any impact on the labor demand elasticity which
is equal to the labor substitution elasticity. This is due to the fact that when β = O, the
CB has only one target (the employment level) which can be always achieved ruling out
the strategic interaction with the labor unions through the price level. The CB in fact
accommodates any Home wage hike one-to-one so that unions can not modify their real
wage.
Notice that, under uncoordinated monetary policies, even though a domestic CB does
not care about inflation at all, the CB abroad always counteracts domestic wage aggres-
siveness with a restrictive monetary policy which, in turn, causes a depreciation of the
domestic exchange rate. This boosts inflation further and acts as a discipline effect on
wage claims, since a nominal wage increase ends in a real wage improvement to a lesser
extent. Nevertheless, when β = O, also the Foreign CB impact to domestic wages fades
away. As a matter of fact, the (negative) response of the CB abroad to a domestic wage
hike is exactly offset by the (positive) response induced by the expansionary money supply
at Homey31.
By contrast, the second part of Remark 4 states that, when a CB cares only about
inflation, the labor demand elasticity is larger in a MU than under a NMP regime. The
main reason for a such result is due to the change in the slope of the Phillips curve (see
section 4). The flatter Phillips curve in a MU entails that, ceteris paribus, the CB is willing
to forego a larger level of employment in order to stabilize inflation. It is worth noticing
that the presence of a Foreign CB under uncoordinated monetary policies increases the
employment consequences of domestic wage rises but Remark 4 stresses that, with an
ultra-conservative CB, the adverse output effect in a MU is always larger than under a
NMP regime and, consequently, it discourages wage aggressiveness to a larger extent.
Is labor demand elasticity and, hence, macroeconomic consequences more sizeable with
a conservative or liberal CB? As the following proposition points out, this depends on the
monopolistic distortion in the factor market.
Equation (43) and (44) show that when a CB has inflation as overriding objective,
the employment level may be larger or smaller than equation (42). Thus the idea that an
ultra-conservative CB can always restore efficiency is rejected. In general labor demand
elasticity and, hence, the macroeconomic consequences of a conservative CB depends on
31Domestic and foreign money supply are strategic complements (see Cuciniello, 2007).
17