Non-Atomistic Wage Setters and Monetary Policy in a New Keynesian Framework

This paper extends an otherwise standard New Keynesian (NK) model to allow for the presence of large wage setters. Building on monetary models from an earlier generation, I contribute to the NK literature by adding some new insight. It is shown that once the presence of large wage setters is taken into account, the degree of wage setting centralization and the aggressiveness of the central bank in stabilizing inflation jointly affect steady state employment. Because of this interaction, the benefits associated with inflation stabilization increase in the centralization of the wage bargaining process.