Productivity Shock and Optimal Monetary Policy in a Unionized Labor Market. Forthcoming: The Manchester School

This paper presents a New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The bargaining process between unions and firms introduces real wage rigidity and creates an endogenous trade-off between inflation and output stabilization. Under an optimal discretionary monetary policy a negative productivity shock requires an increase in the nominal interest rate. Moreover, an operational instrument rule 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 efficient rate of interest. The model calibration studies the response of the unionzed economy to productivity shocks under different monetary policy rules. Download Inf

Endogenous Market Structures and Labor Market Dynamics

We propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously. The interplay between firms endogenous entry, strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables, and helps addressing the unemployment-volatility puzzle. Consistently with U.S. evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net firms' entry is procyclical and the price mark up is countercyclical.Endogenous Market Structures; Firms' Entry; Search and Matching Frictions

Endogenous Market Structures and Labor Market Dynamics

We propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously. The interplay between firms endogenous entry, strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables, and helps addressing the unemployment-volatility puzzle. Consistently with U.S. evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net firms’ entry is procyclical and the price mark up is countercyclical.Endogenous Market Structures, Firms’ Entry, Search and Matching Frictions

Unions Power, Collective Bargaining and Optimal Monetary Policy

We study Ramsey policies and optimal monetary policy rules in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power dampen wage fluctuations and amplify employment fluctuations relatively to a DNK model. The optimal monetary policy must trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions' monopoly power. In this context the monetary authority uses inflation as a tax on unions' rents. The optimal monetary policy rule targets unemployment alongside inflation.

Trend Inflation and Firms Price-Setting: Rotemberg vs. Calvo

We compare two widely used pricing assumptions in the New-Keynesian literature: the Calvo and Rotemberg price-setting mechanisms. We show that, once trend in?ation is taken into account, the two models are very different. i) The long-run relationship between inflation and output is positive in the Rotemberg model and negative in the Calvo model. ii) The log-linearized NKPCs are very different and the dynamics of the two models differs even to a first order approximation. iii) Positive trend inflation enlarges the determinacy region in the Rotemberg model, while it shrinks the determinacy region in the Calvo model. iv) The responses of output and inflation to a positive technology shock are amplified by trend inflation in Calvo, while they are damped in Rotemberg. v) The two models imply a different non-linear adjustment after a disinflation.Firms Pricing, Trend Inflation, Determinacy, Disinflation.

Endogenous Market Structures and Labor Market Dynamics (New version)

We propose a model characterized by strategic interactions among an endogenous number of producers and search and matching frictions in the labor market. In line with U.S. data: (i) new firms account for a relatively small share of overall employment, but they create a relevant fraction of new jobs; (ii) firms’ entry is procyclical; (iii) price mark ups are countercyclical, while aggregate profits are procyclical. In response to a technology shock the labor share decreases on impact and overshoots its long run level. Also the propagation on labor market variables is stronger than in the standard search model. We argue that the countercyclicality of the price mark up is the key mechanism for our results.Endogenous Market Structures, Job Creation, Firms’ Entry, Search and Matching Frictions.

We analyze, in this paper, a DSGE New Keynesian model with indi- visible labor where firms may belong to two different final goods producing sectors one where wages and employment are determined in competitive labor markets and the orther where wages and employment are the result of a contractual process between unions and firms. Bargaining between firms and monopoly unions implies real wage rigidity in the model and, in turn, an endogenous trade-off between output stabilization and infla- tion stabilization. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock is crucially determined by the proportion of firms that belong to the competitive sec- tor. The larger is this number, the smaller are these effects. We derive a welfare based objective function as a second order Taylor approxima- tion of the expected utility of the economy's representative agent and we analyze optimal monetary policy. We show that the larger is the num- ber of firms that belong to the competitive sector, the smaller should be the response of the nominal interest rate to exogenous productivity and cost-push shocks. If we consider, however, an instrument rule where the interest rate must react to inflationary expectations, the rule is not af- fected by the structure of the labor market. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is larger than real wage volatility.

monetary policy

Endogenous market structures and labour market dynamics

We propose a flexible prices model where endogenous market structures and search and matching frictions in the labour market interact endogenously. The interplay between firms’ endogenous entry, strategic interactions among producers and labour market frictions represents a strong amplification channel for technology shocks on labour market variables and helps in addressing the unemployment- volatility puzzle. Consistently with US evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net entry of firms is procyclical and the price mark-up is countercyclical.endogenous market structures; firms’ entry; search and matching; friction

Policy Games with Liquidity Constrained Consumers

In the light of the recent financial crisis, we investigate the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authority are independent and play strategically. We find that limited asset market participation strongly affects the optimal steady state and the optimal dynamics of the different policy regimes considered. In particular: (i) both in the long run and in short run equilibrium, a greater inflation bias is optimal than in the standard representative agent economy; (ii) in response to a markup shock, fiscal policy becomes more active as the fraction of liquidity constrained agents increases; (iii) optimal discretionary policies imply welfare losses for Ricardian, while liquidity constrained consumers experience welfare gains with respect to Ramsey.liquidity constrained consumers, optimal monetary and fiscal policy, strategic interaction, inflation bias