Working Paper

Unions Power, Collective Bargaining and Optimal Monetary Policy

Kiel Working Papers, 1490

We study the design of optimal monetary policy (Ramsey policies) in a model with sticky

prices and unionized labour markets. Collective wage bargaining and unions monopoly power

tend to dampen wage fluctuations and to amplify employment fluctuations relatively to a DNK

model with walrasian labour markets. The optimal monetary policy must trade-off counteracting

forces. On the one side deviations from zero inflation allow the policy maker to smooth inefficient employment fluctuations. On other side, the presence of wage mark-ups and wage stickiness produce inflationary pressures that require aggressive inflation targeting. Overall we find that the Ramsey planner deviates from full price stability and that an optimal rule targets inflation the real economic activity alongside inflation.

Authors

Lorenza Rossi

Info

Publication Date
JEL Classification
E0, E4, E5, E6