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



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



More intriguing information

1. The name is absent
2. Public Debt Management in Brazil
3. Long-Term Capital Movements
4. The name is absent
5. The ultimate determinants of central bank independence
6. Demographic Features, Beliefs And Socio-Psychological Impact Of Acne Vulgaris Among Its Sufferers In Two Towns In Nigeria
7. A Brief Introduction to the Guidance Theory of Representation
8. On s-additive robust representation of convex risk measures for unbounded financial positions in the presence of uncertainty about the market model
9. Gerontocracy in Motion? – European Cross-Country Evidence on the Labor Market Consequences of Population Ageing
10. MULTIMODAL SEMIOTICS OF SPIRITUAL EXPERIENCES: REPRESENTING BELIEFS, METAPHORS, AND ACTIONS
11. The Social Context as a Determinant of Teacher Motivational Strategies in Physical Education
12. Evolving robust and specialized car racing skills
13. Gender and headship in the twenty-first century
14. What Lessons for Economic Development Can We Draw from the Champagne Fairs?
15. Fiscal Policy Rules in Practice
16. The name is absent
17. The name is absent
18. The name is absent
19. Fortschritte bei der Exportorientierung von Dienstleistungsunternehmen
20. Industrial Employment Growth in Spanish Regions - the Role Played by Size, Innovation, and Spatial Aspects