Labor market regimes and the effects of monetary policy

In this paper, we evaluate the effects of monetary policy on inflation and unemployment under different institutional arrangements in the labor market. We show that the effects of monetary policy on the real economy depend critically on the wage formation regime, and on the ways in which the restrictiveness of policy interacts with product price competition, wage setting centralization and the utility weight unions place on real wage premiums as compared to unemployment. Our analysis emphasizes how the posture of monetary policy toward inflation influences the strategic calculations driving unions' wage setting behavior in different institutional environments.