Optimal monetary policy in a monetary union with non-atomistic wage setters

Abstract

In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that a centralized wage setting (CWS) and central bank conservatism (CBC) curb unemployment only if labor market distortions are sizeable. When labor distortions are su¢ ciently low, employment may be maximized by atomistic wage setters or a pop- ulist CB. The comparison between the national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts in ation in the absence of strategic e¤ects. However, when strategic inter- actions between CB(s) and trade unions are taken into account, the shift to a MU unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a su¢ ciently conservative CB or with fully CWS. Conversely, when labor market distortions are less rel- evant, the paper shows that an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving.