Rossi, Lorenza and Mattesini, Fabrizio (2007): Optimal Monetary Policy in a Dual Labor Market Economy.
Download (234kB) | Preview
We analyze, in this paper, DSNK general equilibrium model with indivisible labor where firms may belong to two different final goods producing sectors: one where wages and employment are determined in competitive labor markets and the orther where wages and employment are the result of a contractual process between unions and firms. The presence of monopoly unions introduces real wage rigidity in the model and this implies a trade-off between output stabilization and inflation stabilization i.e., as in Blanchard and Galì (2005), the so called "divine coincidence" does not hold. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock is crucially determined by the proportion of firms that belong to the competitive sector. The larger is this number, the smaller are these effects. We derive a welfare based objective function as a second order Taylor approximation of the expected utility of the economy's representative agent and we analyze optimal monetary policy under discretion and under constrained commitment. We show that the larger is the number of firms that belong to the competitive sector, the smaller should be the response of the nominal interest rate to exogenous productivity and cost-push shocks. If we consider, however, an instrument rule where the interest rate must react to inflationary expectations, the rule is not affected by the structure of the labor market. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is larger than real wage volatility.
|Item Type:||MPRA Paper|
|Institution:||Università Cattolica del Sacro Cuore - Milano|
|Original Title:||Optimal Monetary Policy in a Dual Labor Market Economy|
|Keywords:||optimal Monetary Policy; Taylor Rule; Dual Labor Market; Monopolist Union|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
J - Labor and Demographic Economics > J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J51 - Trade Unions: Objectives, Structure, and Effects
J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||lorenza rossi|
|Date Deposited:||01. Apr 2007|
|Last Modified:||19. Feb 2013 08:27|
Anderson S., and Devereux M. (1988). Trade Unions and the Choice of Capital Stock, Scandinavian Journal of Economics 90, 27--44. Andres J. R., Domenech R., and Ferri J. (2006). Price Rigidity and the Volatility of Vacancies and Unemployment, mimeo, Universidad de Valencia. Amato J. D., Laubach T. (2003). Estimation and Control of an Optimization-Based Model with Sticky Prices and Wages. Journal of Economic Dynamics and Control 27, 1181-1215. Blanchard O. and Galì J. (2006). Real Wage Rigidities and the New Keynesian Model, Journal of Money Credit and Banking, forthcoming. Blanchard O. and Galì J. (2006). A New Keynesian Model with Unemployment. mimeo. Calvo G. A. (1983), Staggered Prices in a Utility-Maximizing Framework, Journal of Monetary Economics 12(3) 383-398. Chéron A. and Langot F. (2000). The Phillips and Beveridge Curves Revisited, Economics Letters 69, 371-376. Clarida R., Galì J., Gertler M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 47 (4) 1661-1707. Christoffel K., Linzert T. (2005). The Role of Rela wage Rigidities and Labor Markets Friction for Unemployment and Inflation Dynamics, ECB Working Paper Series n° 556. Christoffel K., Kuester K., Linzert T. (2006). Identifying the Role of Labor Markets for Monetary Policy in an Estimated DSGE Model, ECB Working Paper Series n° 635. Dixit A. K., Stiglitz J. E., (1977), Monopolistic Competion and Optimum Product Diversity, American Economic Review, 67, 297-308. Dunlop J. T. (1944). Wage Determination under Trade Unions, London, Macmillan. Farber H. S. (1986). The Analysis of Union Behavior, in Ashenfelter O., Card D., a cura di (1986), vol. II, 1039-1089. Francis N. R., Owyang M. T., Theodorou A. T. (2005). What Explains the Varying Monetary Response to Technology Shocks in G-7 Countries? International Journal of Central Banking, 1 (3) 33-71. Galí J. (2001), The Conduct of Monetary Policy in the Face of Technological Change: Theory and Postwar U.S. Evidence, in Stabilization and Monetary Policy: the International Experience, Banco de México. Galì J., Lòpez-Salido J. D., Vallès J. (2003). Technology Shocks and Monetary Policy: assessing the Fed's Performance, Journal of Monetary Economics, 50 723-743. Galì J., Rabanal P. (2004). Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data? NBER Working Paper n° 10636. Galì J., Monacelli T. (2005). Monetary Policy and Exchange Rate Volatility ina Small Open Economy, Review of Economic Studies, 72, pp. 917-946. Gertler M., Trigari A. (2006). Unemployment Fluctuations with Staggered Nash Wage Bargaining, mimeo. King R., Rebelo S. T. (2000). Resusciting Real Business Cycles, Rochester Center for Economic Research, Working Paper No. 467. King R., C. Plosser, and S. Rebelo. (1988a). Production, Growth, and Business Cycles I: The Basic Neoclassical Model. Journal of Monetary Economics, 21, 195-232. Hansen G. (1985). Indivisible Labor and the Business Cycle, Journal of Monetary Economics, 16 309-328. Ireland P. N. (2004). Technology Shocks in the New-Keynesian Model, Review of Economics and Statistics, 86(4), 923-936. Lawrence S., Ishikawa J. (2005). Trade Union Membership and Collective Bargaining Coverage: Statistical Concepts, Methods and Findings, Working Paper n° 59, International Labor Office of Geneva. Maffezzoli M. (2001.) Non-Walrasian Labor Markets and Real Business Cycles, Review of Economics Dynamics 4, 860-892. Mortensen D.T., Pissarides C.A., (1994), Job Creation and Job Destruction in the Theory of Unemployment, Review of Economic Studies, vol. 61, pp. 397-416. Moyen S. and Sahuc , J. G. (2005), Incorporating labour market frictions into an optimizing-based monetary policy model, Economic Modelling 22, 159-186. Oswald A. (1982). The Microeconomic Theory of the Trade Union, Economic Journal, 92, 576-595. Pissarides C. (2000). Equilibrium Unemployment Theory, MIT Press. Pissarides, C. (1998). The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure, European Economic Review 42, 155--183. Rogerson, R. (1988). Indivisible Labor Lotteries and Equilibrium, Journal of monetary Economics 21, 3-16. Rogerson R., and Wright R. (1988). Involuntary Unemployment in Economics with Efficient Risk Sharing, Journal of Monetary Economics 22, 501-515. Trigari A. (2005). Equilibrium Unemployment, Job flows, and Inflation Dynamics, ECB WP#304. Trigari A. (2006). The Role of Search Frictions and Bargaining of Infla- tion Dynamics, mimeo. Walsh C. (2003). Labor Market Search and Monetary Shocks", in Elements of Dynamic Macroeconomic Analysis, S. Altug, J. Chadha and C. Nolan eds. Walsh C. (2005). Labor market search, Sticky Prices, and Interest Rate Rules", Review of Economic Dynamics 8, 829-849. Woodford M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, Princeton. Smets F., Wouters R. (2003). An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area, Journal of the European Economic Association, MIT Press, 1(5), 1123-1175. Zanetti F. (2004). A Non-Walrasian Labor Market and the European Business Cycle, Boston College, Working Papers in Economics, n° 31.
Available Versions of this Item
- Optimal Monetary Policy in a Dual Labor Market Economy. (deposited 01. Apr 2007) [Currently Displayed]