Union power, collective bargaining, and optimal monetary policy

Faia, E. and Rossi, L. (2013) Union power, collective bargaining, and optimal monetary policy. Economic Inquiry, 51 (1). pp. 408-427. ISSN 0095-2583

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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.

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Journal Article
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Economic Inquiry
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08 Oct 2021 12:50
Last Modified:
17 Sep 2023 03:07