By Sebastian Dullien (auth.)
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Extra info for The Interaction of Monetary Policy and Wage Bargaining in the European Monetary Union: Lessons from the Endogenous Money Approach
As larger unions have to take into account the effects of their own wage demands on aggregate employment and thus the central bank’s determination to inﬂate the economy, the more centralised wage bargaining is, the more pronounced will be this effect. A positive correlation between wage bargaining centralisation and unemployment thus emerges. This conclusion changes when unions become sufﬁciently inﬂation averse: in this case, sufﬁciently centralised unions constrain their wage demands so as to keep unemployment low enough for the central bank not to inﬂate.
In the real world, these assumptions are problematic. Inﬂation does redistribute between different groups of society. If ﬁnancial contracts are not indexed, creditors lose while debtors gain. As ﬁrms are usually debtors, some inﬂation might ease their debt burden and in the short run improve their ﬁnancial position, which might lead to more employment in the very short run. Moreover, empirically it is the holders of bonds and receivers of transfer incomes such as welfare and public pensions18 who suffer most from inﬂation, as their incomes are not indexed and are usually adjusted only with a time lag.
The theoretical cause that unions are inﬂation averse is to a certain degree plausible:17 ﬁrst, how could policy makers be inﬂation averse without inﬂation-averse private actors? Any actual government’s utility must derive from some combination of private actors’ utilities. So if the central bank dislikes inﬂation, so must private actors. Second, as private actors hold non-fully indexed nominal assets or pension schemes, they might lose from inﬂation. However, these considerations do not necessarily lead to the conclusion that unions have to behave in a way that reduces inﬂation.