Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: In this paper we use a standard multi-union, monopolistic competition model to evaluate analytically and numerically the effects of monetary policy on inflation and unemployment under different institutional arrangements in the labor market that are defined by the rigidity of nominal wages. We show that the effects of monetary policy on the real economy depend critically on the wage formation regime, and on the ways in which the restrictiveness of policy interacts with product price competition, wage setting centralization and the utility weight unions place on real wage premiums as compared to unemployment. Our interpretation of the results emphasizes how the posture of monetary policy toward inflation influences the strategic calculations driving unions’ wage setting behavior in different institutional environments.

Keywords: Policy games; monetary policy neutrality; trade unions; monopolistic competition; labor markets

JEL-codes: E52; E58; J51

30 pages, First version: August 11, 2004. Revised: May 12, 2006. Earlier revisions: April 22, 2005.

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Published as

Nicola Acocella, Giovanni Di Bartolomeo and Douglas A. Hibbs Jr., (2008), 'Labor market regimes and the effects of monetary policy', Journal of Macreconomics, vol 30, pages 134-156

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