Centralized wage setting under alternative monetary policy rules

Sumary This paper characterizes the wage setting behavior in a totally unionized economy under different monetary policy strategies. The wage formation strategy of the union can be either aggressive or cooperative. As long as the union is fully cooperative and in the absence of shocks, the government can completely attain its macroeconomic targets: full employment and price stability. If, however, the union becomes unexpectedly aggressive, a constant money supply rule has a nominal wage inflation bias under certain plausible assumptions. By changing the rules of the game,e.g. following a nominal GNP or price level (inflation) rule, wage demands would be lower and the economy better off.I thank an anonymous referee for valuable comments on an earlier version of this paper. The usual disclaimer applies.