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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

Example text

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.

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