Rossi, Lorenza and Mattesini, Fabrizio (2007): Optimal Monetary Policy in a Dual Labor Market Economy.
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Abstract
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 tradeoff 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 costpush 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 costpush 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 
Language:  English 
Keywords:  optimal Monetary Policy; Taylor Rule; Dual Labor Market; Monopolist Union 
Subjects:  E  Macroeconomics and Monetary Economics > E2  Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24  Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity J  Labor and Demographic Economics > J5  LaborManagement Relations, Trade Unions, and Collective Bargaining > J51  Trade Unions: Objectives, Structure, and Effects E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E32  Business Fluctuations ; Cycles 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 
Item ID:  2827 
Depositing User:  lorenza rossi 
Date Deposited:  19. Apr 2007 
Last Modified:  17. Mar 2015 11:55 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/2827 
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Optimal Monetary Policy in a Dual Labor Market Economy. (deposited 01. Apr 2007)
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