Interaction of Monetary Policy and Wage Bargaining in the European Monetary Union


Sebastian Dullien gives a novel explanation for unemployment and inflation in the Euro-Zone. He argues that unemployment stems from a lack of cooperation between unions and monetary authorities. In an economy with endogenous money and monopolistic competition in good markets, the standard economic textbooks' distribution of macroeconomic responsibilities are turned upside down - wage setters are now responsible for price stability, while the European Central Bank is responsible for level of output. Only unions with a small and limited constituency can increase employment by simple wage restraint. However, this is shown to be a beggar-thy-neighbour policy, destroying employment elsewhere. On a European level, only when unions and the central bank cooperate can high employment and low inflation be achieved simultaneously. The institutional set-up with the 1999 Cologne process is found to be unable to assure such a cooperation.

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