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The Nonneutrality of Monetary Policy with Large Price or Wage Setters

David Soskice and Torben Iversen
The Quarterly Journal of Economics
Vol. 115, No. 1 (Feb., 2000), pp. 265-284
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2586941
Page Count: 20
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The Nonneutrality of Monetary Policy with Large Price or Wage Setters
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Abstract

Monetary rules matter for the equilibrium rate of employment when the number of price-wage setters is small, even when assuming rational expectations, complete information, central bank precommitment, and absence of nominal rigidities. If the central bank is nonaccommodating, sufficiently large unions, bargaining independently, have an incentive to moderate sectoral money wages, and thereby expected real wages. The result is an increase in the real money supply, and hence higher demand and employment. This does not hold with accommodating monetary policy since unions' wage decisions cannot then affect the real money supply. A similar argument holds for large monopolistically competitive price setters.

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