UNION POWER, COLLECTIVE BARGAINING, AND OPTIMAL MONETARY POLICY

Authors

  • ESTER FAIA,

    1. Faia: Department of Money and Macroeconomics, Goethe University Frankfurt, CFS and Kiel IfW, Frankfurt am Main, Germany. Phone +49-69-798-33836, Fax +49-69-798-33925, E-mail faia@wiwi.uni-frankfurt.de
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  • LORENZA ROSSI

    1. Rossi: Department of Economics and Business, University of Pavia, Pavia, Italy. Phone +39-0382-986483, Fax +39-0382-986228, E-mail lorenza.rossi@eco.unipv.it
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    • We thank Nina Biljanovska for excellent research assistance with the empirical evidence. We thank conference participants at EES “Labor Market and the Business Cycle” at Kiel IfW.


Abstract

We study Ramsey policies and optimal monetary policy rules in a dynamic New Keynesian model with unionized labor markets. Collective wage bargaining and unions' monopoly power amplify inefficient employment fluctuations. The optimal monetary policy must trade off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions' monopoly power. In this context the monetary authority uses inflation as a tax on union rents and as a mean for indirect redistribution. Results are robust to the introduction of imperfect insurance on income shocks. The optimal monetary policy rule targets unemployment alongside inflation. (JEL E0, E4, E5, E6)

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