Macroeconomic Performance and Wage Bargaining in a Monetary Union

Building on a micro-founded model of a two-region monetary union, this paperanalyses the macroeconomic impact of institutional reforms in labour marketsand central banking that may occur as a result of monetary unification. Thepaper shows that monopoly distortions in the labour market are a key factorin evaluating the effects of central bank's conservativeness and wagecentralisation on inflation and unemployment. Wage restraint is favoured ina highly decentralised wage bargaining setup as well as under a liberalcentral bank, provided competition is high in the labour market.