Faculty of Economics and Business Administration Publications Database

Unions Power, Collective Bargaining and Optimal Monetary Policy

Rossi, Lorenza
Volume: 51
Number: 1
Pages: 408 - 427
Month: January
Link External Source: Online Version
Year: 2013
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.