DP903 Labour Market Structure, Conservative Bankers and the Feasibility of Monetary Union

Author(s): Paul L Levine, Joseph Pearlman
Publication Date: February 1994
Keyword(s): Conservative Bankers, European Central Bank, Labour Market Structure
JEL(s): E58, J41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=903

This paper examines the conduct of monetary policy in an economy with overlapping multi-period nominal wage contracts. We examine the welfare implications of stabilization policy in the face of random supply shocks. In the absence of precommitment, the discretionary policy can be improved by choosing bankers who are more conservative than the `median voter' in that they attach a higher priority to achieving low inflation than higher output. The choice of an optimal banker depends on the degree of nominal and real wage rigidities and the presence of the latter can improve the feasibility of a monetary union.