Monetary Institutions,Monopolistic Competition,Unionized Labor Markets and Economic Performance*

Recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy, but not both. This leads to two opposing views about the effects of central bank conservativeness. We evaluate the relative merits of those conflicting views by developing a unified framework. We find that: (i) the effect of conservativeness on employment depends on unions’ relative aversion to unemployment versus inflation, and (ii) for plausible values of this relative aversion (and more than one union), social welfare is maximized under a highly conservative central bank. We also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation.