Template-Type: ReDIF-Paper 1.0
Author-Name: Fabrizio Mattesini
Author-X-Name-First: Fabrizio
Author-X-Name-Last: Mattesini
Author-Email: mattesini@economia.uniroma2.it
Author-Workplace-Name: Università di Roma 2
Author-Name: Lorenza Rossi
Author-X-Name-First: Lorenza
Author-X-Name-Last: Rossi
Author-Email: lorenza.rossi@unicatt.it
Author-Workplace-Name: DISCE, Università Cattolica
Title: Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy
Abstract: In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model
characterized by  labor indivisibilities, unemployment and a unionized labor market.
The presence of monopoly unions introduces real wage rigidities in the model.
We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold
and a trade-off between inflation stabilization and the output stabilization arises.
In particular, a productivity shock has a negative effect on inflation,
while a reservation-wage shock has an effect of the same size but with the opposite sign.
We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation
of the expected utility of the economy's representative household, 
and we analyze optimal monetary policy under discretion and under commitment. 
Under discretion a negative productivity shock and a positive exogenous wage shock will 
require an increase in the nominal interest rate. An operational instrument rule, 
in this case, will satisfy the Taylor principle, but will also require that the 
nominal interest rate does not necessarily respond one to one to an increase in the 
interest rate that supports the efficient equilibrium. The results of the model are 
consistent with a well known empirical regularity in macroeconomics, i.e. that employment 
volatility is relatively larger than real wage volatility.
Length: nn pages 62
Creation-Date: 2007-03

File-URL: http://www.unicatt.it/Istituti/EconomiaFinanza/Quaderni/ief0072.pdf
File-Format: Application/pdf
File-Function: First version, 2006
Number: ief0072
Classification-JEL: E24, E32, E50, J23, J51
Keywords: Optimal Monetary Policy, Monopolist Union, Labor Indivisibility
Handle: RePEc:ctc:serie3:ief0072