Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152622
Authors: 
Grüner, Hans Peter
Year of Publication: 
2002
Series/Report no.: 
ECB Working Paper 188
Abstract: 
In this paper I show that central bank flexibility may not be desirable when it encourages trade unions to behave more aggressively. The argument is based on a model where risk averse trade unions interact with a central bank. A flexible central bank stabilizes economic shocks and reduces output volatility. This enables trade unions to realize higher real wages without risking the unemployment of some insider workers. Risk averse insiders demand higher real wages, generate more inflation and more unemployment. The overall e ect on welfare may be negative. A conservative central bank instead increases output and employment on average but raises output volatility. The argument also sheds new light on the issue of optimum currency areas. Wage claims are lower and employment is higher in a currency union if national trade unions expect the central bank to do less to secure employment of insider workers in their country.
Subjects: 
central bank credibility
central bank flexibility
Optimum Currency Area
JEL: 
E52
E58
Document Type: 
Working Paper

Files in This Item:
File
Size
840.51 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.