Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy

Mattesini, Fabrizio and Rossi, Lorenza (2006): Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy. Forthcoming in: The Manchester School

Abstract

This paper presents a New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The bargaining process between unions and firms introduces real wage rigidity and creates an endogenous trade-off between inflation and output stabilization. Under an optimal discretionary monetary policy a negative productivity shock requires an increase in the nominal interest rate. Moreover, an operational instrument rule will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model calibration studies the response of the unionzed economy to productivity shocks under different monetary policy rules.

• Item Type: MPRA Paper
• Institution: Universit di Roma "Tor Vergata"
• Language: English
• Keywords: Optimal Monetary Policy; Unionized Labor Market; Indivisible Labor; Taylor Rule
• 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 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J51 - Trade Unions: Objectives, Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; 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 > E50 - General

References

Mattesini F., Rossi L., (2008), Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy.