Monetary policy, exchange rates and labor unions in SEE and the CIS during the financial crisis

- We analyze monetary policy, wages, prices and output in SEE and CIS countries.
- Our focus is on the effects of trade unions and the regime of the exchange rate.
- Fixed exchange rates and strong unions constrain monetary policy in these countries.
- Inflation in SEE and CIS depends more on wages than on monetary policy actions.
- Trade unions may be more effective for controlling inflation than monetary authorities.

The objective of this paper is to assess whether the levels of unionization and the rigidity of exchange rates represent a constraint for the monetary policy in South-Eastern Europe and the Commonwealth of Independent States, with a particular focus on the recent economic crisis. Toward that end, a New Keynesian model with price and wage rigidities is used. The results show that monetary policy responded counter-cyclically during the crisis only in countries with weak trade unions and in countries with flexible exchange rates, which indicates that fixed exchange rates and strong trade unions constrain monetary policy in countries in these regions. Also, the findings show that the main driver of price inflation in these countries is not economic activity, but wages, which are affected to a large extent by trade unions. Therefore, trade unions should be active partners in the decision-making processes in these countries.