Unions, Monopolistic Competition and the Optimal Monetary Regime

Abstract

This paper considers the optimal monetary regime in a monopolistically competitive economy where wages are set by non-atomistic (i.e. large) unions. In such a context, the conduct of monetary policy is known to influence not only the equilibrium inflation rate, but also equilibrium employment. Previous contributions which have examined this scenario have commonly concluded that a low degree of accommodation of wages and prices is optimal. This study shows, however, that the framework's principal features imply a highly accommodating policy stance can potentially achieve a superior outcome and, indeed, despite its character, is able to both eliminate unemployment and deliver zero inflation.