Working Paper: CEPR ID: DP2819
Authors: Francesco Lippi
Abstract: Most monetary policy analyses assume an atomistic private sector, thereby ignoring strategic interactions between policy and wage-setting decisions. Yet, non-atomistic wage-setters are a key feature of several industrialized economies. We study the economic consequences of non-atomistic agents and show that this qualifies previous results on the effects and desirability of conservative central bankers. In particular, the central bank aversion to inflation may have a permanent effect on structural employment, while no such effect emerges with atomistic agents. This prediction is consistent with evidence that unemployment is positively associated with conservatism in countries where wage-setting is non-atomistic but not in the countries where wage setting is decentralized.
Keywords: Conservatism; Nonatomistic Agents; Strategic Monetary Policy; Wagesetting
JEL Codes: E50; J50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structural unemployment (J64) | increased conservatism (expected inflation) (E31) |
| nonatomistic wagesetters (J31) | increased conservatism (expected inflation) (E31) |
| large unions (J51) | altered dynamics of labor demand and employment choices (J29) |
| increased conservatism (expected inflation) (E31) | structural unemployment (J64) |
| decentralized wagesetting (J38) | no significant relationship with conservatism (A13) |