Phillip Lawler

Centralised Wage Setting, Inflation Contracts, and the Optimal Choice of Central Banker

The paper examines the appropriate design of central banking institutions in an economy in which the nominal wage is set by an inflation-averse monopoly union as a positive mark-up over its market-clearing value. The analysis considers both the optimal choice of central banker and the potential role for a linear inflation contract. The optimal set of arrangements is a central banker who attaches less significance to inflation than does society, combined with an inflation contract where the value of the contract parameter is related to the unions degree of inflation-aversion.

The Monetary Model of Exchange Rates: Evidence from the Canadian Float of the 1950s

Abstract This paper applies the Johansen cointegration technique to examine the validity of the monetary model of exchange rate determination as an explanation of the Canadian dollar–United States dollar relationship over the period of the Canadian float 1950–62. A single cointegrating vector is identified whose coefficients conform in broad terms to the restrictions implied by the monetary model, thus lending support to the interpretation of the model as describing a long-run equilibrium relationship. This support is reinforced by the results derived from the associated error-correction model, which identify a clear short-run tendency for the exchange rate to revert to the equilibrium value defined by the estimated long-run model.

Monetary uncertainty, strategic wage setting and equilibrium employment

Abstract An important recent strand of literature has shown that if wages are set strategically by inflation-averse, non-atomistic unions then equilibrium employment is sensitive to the monetary regime. This note demonstrates that such sensitivity need not reflect a direct aversion to inflation by unions, but instead may result from union concerns for employment objectives in circumstances in which the variance and mean value of inflation are positively related.

Union Wage Setting and Exchange Rate Policy

The performance of an optimally managed float is compared with that of a credibly fixed exchange rate in a small open-economy framework where wages are set by a monopoly union. Two key results emerge. First, a sufficient condition for the managed float to outperform a fixed rate is that the union be no less inflation-averse than society. Second, introducing an inflation target into the central banks loss function ensures the superiority of the managed float regardless of the weight attached to inflation by the union. Both results reflect the sensitivity of the union mark-up to the policy regime.

Wage indexation and government intervention under perfect information

The paper examines endogenous indexation in a setting in which the monetary authorities, in minimizing a social loss function with employment and inflation as arguments, are able to react instantaneously to velocity and productivity shocks. In this context a symmetric Nash equilibrium in which all firms set their indexation parameter at unity is identified. This equilibrium is inefficient but, we argue, is unlikely to be attained in practice. However, no alternative equilibria are defined unless bounds are placed upon the degree of indexation which agents may adopt.

Optimal Transparency and Policy Intervention with Heterogeneous Signals and Information Stickiness

This paper investigates optimal central bank disclosure in an economy in which only a proportion of firms adjusts prices each period to reflect current information. Such information comprises a firm-specific signal of the current state of aggregate demand and, potentially (depending on the transparency regime) a public signal disseminated by the central bank. The economy has two sources of price dispersion: first, the heterogeneity of the private signals of firms whose prices always reflect current information, and second, the non-adjustment of prices by firms that fail to update their information from period-to-period. Monetary policy is conducted by the central bank to maximize expected welfare, with the studys focus on the optimal degree of transparency. A key finding is that, for plausible values of model parameters, full transparency cannot be optimal: whether zero or partial transparency is desirable then depends on the proportion of firms failing to update their information each period.

Unions, Monopolistic Competition and the Optimal Monetary Regime

This paper considers the optimal monetary regime in a monopolistically competitive economy where wages are set by non-atomistic (i.e. large) unions. In such a context, the conduct of monetary policy is known to influence not only the equilibrium inflation rate, but also equilibrium employment. Previous contributions which have examined this scenario have commonly concluded that a low degree of accommodation of wages and prices is optimal. This study shows, however, that the frameworks principal features imply a highly accommodating policy stance can potentially achieve a superior outcome and, indeed, despite its character, is able to both eliminate unemployment and deliver zero inflation.