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

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

Vincenzo Cuciniello*

This version: June 2007
(First Draft: April 2007)

Abstract

In a micro-founded framework in line with the new open economy macroeconomics,
the paper shows that more centralized wage setting (CWS) and central bank conser-
vatism (CBC) curb unemployment only if labor market distortions are sizeable. When
labor market distortions are sufficiently low, employment may be maximized by atom-
istic wage setters or a populist CB. The comparison between a national monetary
policy (NMP) regime and the monetary union (MU) reveals that a move to a MU
boosts inflation in the absence of strategic effects. However, when strategic interac-
tions between CB(s) and trade unions are taken into account, the shift to a MU when
monopoly distortions are sizeable unambiguously increases welfare and employment
either in presence of a sufficiently conservative CB or with a fully CWS. Finally, when
labor market distortions are less relevant, an ultra-populist CB or atomistic wage set-
ters are optimal for the society and a shift to a MU regime is unambiguously welfare
improving.

JEL classification : E2, E42, E5, F31, F41

Keywords : Central bank conservatism, centralization of wage setting, inflationary
bias, monetary union.

1 Introduction

The creation of the European Monetary Union (EMU) has ruled out the possibility of
using the exchange rate as a substitute for structural reforms among the euro area member
states. This implies that the costs of implementing inefficient institutions become more
apparent since the lack of nominal exchange rate puts the burden of adjustment on labor

‘University of Siena; e-mail: cuciniello©unisi.it

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