Working Paper: CEPR ID: DP2218
Authors: Francesco Lippi
Abstract: The literature on monetary policy games establishes that policy makers' attempts to boost employment above the 'natural' rate are futile and result in an inflationary bias when wage setters have rational expectations and the policy maker cannot precommit. This implies that a variation of the policy maker's degree of inflation aversion does not have a systematic effect on the employment level.This paper shows that this last neutrality result hinges crucially on the assumption that wage setters are atomistic. In the presence of non-atomistic agents, who set nominal wages and have monopolistic power, the policy maker's inflation aversion may have a systematic effect on equilibrium employment even if agents have rational expectations and complete information. The model is used to re-assess the welfare implications of monetary policy delegation to a 'conservative' central bank.
Keywords: inflation; unemployment; monopolistic power; nonatomism; non neutrality; unions
JEL Codes: E5; J5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank's degree of inflation aversion (E31) | Equilibrium employment level (J23) |
| Nominal wage-setting by unions (J51) | Inflation levels (E31) |
| Structure of the labor market (J40) | Employment levels (J23) |
| Central bank's degree of inflation aversion (E31) | Perceived elasticity of labor demand by unions (J59) |
| Perceived elasticity of labor demand by unions (J59) | Equilibrium employment level (J23) |