RICERCA ITALIANA     

New Keynesian dynamics in unionised labour markets and the design of EU institutions

Università degli Studi di Roma "La Sapienza"

Abstract

Our general interest is the optimal design of European institutions, with special attention to the interaction between the central bank and other public and private entities.
Three main findings have assumed relevance in the literature. First, the externalities associated with wage bargaining at the national level may call for international wage coordination. Second, the result that a conservative central banker increases welfare may no longer hold in a closed economy with several unions not concerned about inflation. Third, the relationship between trade unions and policymaking in the EU requires to pay attention to social pacts and corporatism. These findings, together with the relevance of externalities and of trade-offs among different targets existing within the EMU, suggest to develop our interest by addressing the coordination problems (and the associated optimal design of institutions) which arise in the interaction between fiscal authorities, monetary authorities and trade unions.
The aim of the project is to approach this topic reconsidering the results of the literature on the interaction between imperfect (goods and labour) markets and macroeconomic policymakers (LLMI) within the New Keynesian dynamic stochastic general equilibrium models with nominal rigidities (NK-DSGE models).
The Rome local Unit will be concerned with fiscal and monetary policies in a New-Keynesian framework where non-atomistic wage setters interact with the government >>>

Principal Investigator

Nicola ACOCELLA Università degli Studi di ROMA "La Sapienza"

Research Objectives

The general interest of our research group is the optimal design of European institutions, with special attention to the interaction between the central bank and other public and private entities. European institutions have been so far more stability oriented than growth oriented, but the European economy is now passing through a restructuring phase and we believe it is necessary to assess the efficiency and the effectiveness of its institutions, and to evaluate the possibility of producing welfare increasing changes in their design.
When many institutions co-exist, their performance can be measured by their collective ability to reach a set of targets more quickly and/or at lower cost than alternative combinations of institutions. This requirement is particularly relevant in the presence of externalities, of significant trade-offs among different targets and of coordination problems. It is hence particularly important in a monetary union such as the EMU, where a large number of different institutions interact and coordination problems arise among the fiscal policies of different countries, between monetary and fiscal policies, among the wage setters operating in different countries, between macroeconomic policies and wage setting. Many of these problems have so far been tackled in isolation, and some aspects have received little attention in the literature, leading to incorrect or politically-biased policy recommendations, or to ill-designed agreements, such as the >>>

Timescale

24 months

National and international background

The foundations of our research approach are represented by two families of models: LLMI and NK-DSGE models.

1. LLMI
This strand of literature, which developed out of the Barro-Gordon (1983) problem, brought together the debates on the optimal degree of conservativeness in central banking and those on the hump-shaped relationship between wage moderation and the degree of centralisation of wage bargaining popularised by Calmfors and Driffill. As is well known, in the presence of competitive labour markets the degree of central bank conservativeness (CBC) affects inflation but not real variables (Rogoff, 1985), whereas, if labour markets are unionized, CBC affects both inflation and real variables like unemployment, output and real wages.
Hence, in the models dealing with unionised wage setting, both CBC and the degree of centralisation of wage bargaining explain the existing differences in the macroeconomic performance of the industrialised economies, with firms playing the background role of fixing employment by moving along the demand for labour function (e.g., Hall, Franzese, 1996; Cukierman, Lippi, 2002; Guzzo, Velasco, 1999). In this class of models, the non-neutrality of money is explained by the (direct or indirect) presence of inflation, or other objectives different from real wages and employment, in the utility functions of trade unions (Acocella, Ciccarone, 1997; Acocella, Di Bartolomeo, 2004b).
In Cukierman's and Lippi's (1999 >>>