DP2819 | Strategic Monetary Policy with Non-Atomistic Wage-Setters: Some Evidence

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06/04/2001

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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.