Lawler, Phillip
April 2000
Economic Journal;Apr2000, Vol. 110 Issue 463, p559
Academic Journal
This article examines the appropriate design of central banking institutions in an economy in which the nominal wage is set by an inflation-averse monopoly union as a positive mark-up over its market-clearing value. This article has incorporated unionized wage setting into an otherwise standard model of discretionary monetary policy. In so doing it has been demonstrated that this specification of labor market structure has significant implications for the optimal design of central banking institutions. In the absence of supply shocks, with an atomistic labor market but an equilibrium level of employment which, due to some distortion, is less than socially desirable, implies that the appropriate appointment is an individual who cares only about inflation. The present model, with wages set by a single economy-wide union, implies that in a deterministic environment the inflationary bias can be nullified by a central banker who is concerned only with employment. Nonetheless, it is possible for qualitative conclusions to be reinstated within a stochastic setting. Whilst, given a sufficiently inflation-averse union, the social loss-minimizing choice of central banker attaches a greater relative weight to employment than does society, for certain combinations of parameter values the optimal appointment is, as with an atomistic private sector, a conservative.


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