Optimal monetary policy in economies with dual labor markets

Mattesini, F. and Rossi, L. (2009) Optimal monetary policy in economies with dual labor markets. Journal of Economic Dynamics and Control, 33 (7). pp. 1469-1489. ISSN 0165-1889

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Abstract

We present a dynamic stochastic general equilibrium (DSGE) New Keynesian model with indivisible labor and a dual labor market: a Walrasian one where wages are fully flexible and a unionized one characterized by real wage rigidity. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock are crucially determined by the proportion of firms that belong to the unionized sector. The larger this number, the larger are these effects. Consequently, the larger the union coverage, the larger should be the optimal response of the nominal interest rate to exogenous productivity and cost-push shocks. The optimal inflation and output gap volatility increases as the number of the unionized firms in the economy increases.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Economic Dynamics and Control
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2600/2604
Subjects:
ID Code:
160494
Deposited By:
Deposited On:
08 Oct 2021 12:00
Refereed?:
Yes
Published?:
Published
Last Modified:
08 Oct 2021 12:00