The Welfare Effect of Foreign Monetary Conservatism with Nonatomistic Wage Setters

Abstract

This paper extends the closed-economy analysis of strategic interaction between labor unions and the monetary authority in Lippi (2003) to a two-country, open-economy framework. It sheds light on the real effect of foreign central bank conservatism, which—through a strategic mechanism that operates via the terms of trade between the two independent monetary policymakers—entails wage moderation. The impact of domestic central bank conservatism hinges instead on the combination of three strategic effects.