Strategic wage setting, inflation uncertainty and optimal delegation

The paper examines optimal monetary policy delegation in an economy where wages are set strategically by a single economy-wide union whose objectives relate to employment and the real wage. Crucially, the central bank exerts imprecise control over inflation, giving rise to a positive relationship between the mean value of inflation and its variance. In this context, union concerns with regard to the employment goal render equilibrium sensitive to the conduct of monetary policy. As a consequence, optimal delegation arrangements closely resemble those identified as optimal in models that assume a direct aversion to inflation on the part of unions.