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

in the economy and controlling inflation. Labor unions are aware of the unemployment
threat arising from a conservative CB and hold down their wage demands. Since the
number of unions is inversely related to their degree of internalization of the monetary
threat, more centralization will increase the economic performance.

The comparison between the national monetary policy (NMP) regime and the MU
reveals that a move to a MU boosts inflation in the absence of strategic effects. This
is due to a flatter Phillips curve faced by the common CB. However, when strategic
interactions between CB(s) and trade unions are taken into account, the shift to a MU
unambiguously increases welfare and employment when monopoly distortions are sizeable
either in presence of a sufficiently conservative CB or with fully CWS.

Conversely, when labor market distortions are less relevant, a higher degree of CBC
diminishes labor demand elasticity. Since unions are less concerned about the aggregate
unemployment consequences of their wage hikes, they are tempted to set higher nominal
wages which, in turn, increase their own relative real wages. In this case a more conserva-
tive CB is particularly costly in presence of very few unions. In fact, the less is the number
of unions, the more they internalize the real wage gain. As for the welfare analysis, the
paper shows that in presence of keen competition in the labor market, an ultra-populist
CB or atomistic wage setters are optimal for the society and a shift to a MU regime is
unambiguously welfare improving.

9 Appendix

Elasticities of money supply to nominal wages. Following Cuciniello (2007) let
O_h ≡ 1 — 07 and θp ≡ 1 — o(1 — 7) be the slope of the Phillips curve under a NMP regime
in the Home and Foreign country respectively⁴⁶. The elasticity of domestic money supply
to local nominal wages is⁴⁷

Since both domestic and Foreign CBC negatively affects m_hh, it can range from 1 to
— ^—U in the case of ultra-populist (when β_h → 0) and ultra-conservative (when β_h →
∞ Λ β_f → ∞) CB, respectively. The elasticity of money supply to nominal wage abroad
is instead given by⁴⁸

⁴⁶These results are derived in Cuciniello (2007).

⁴⁷Note that ∣∣_hh = μ_pp only if 7 = 1/2 and β∏ = β_p.

⁴⁸Note that p_HF = P∙_fh only if 7 = 1/2.

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