Toralf Pusch

Central banks, trade unions, and reputationâis there room for an expansionist maneuver in the European Union?

It is now a few years since the introduction of the common currency, and Europe is still experiencing high unemployment. The conventional logic attributes this problem to flaws in the labor market. In this paper, we look at the changes that occur if trade unions and the central bank have different options to choose from in a climate of uncertainty. In a single-stage game, the most probable outcome is a high unemployment rate. Results change dramatically if the game is repeated. However, this effect does not occur if the central bank puts a too high weight on price stability.