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Influential Price and Wage Setters, Monetary Policy and Real Effects

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  • George J. Bratsiotis
Abstract
Using a general equilibrium model this paper shows that when large monopolistic firms or unions perceive even a small influence on aggregate nominal variables, price targeting results in a higher equilibrium output than monetary accommodation. This is because price targeting increases, whereas monetary accommodation decreases, (i) the price elasticity of demand, (ii) the labour elasticity of demand and (iii) the elasticity of the wage with respect to households’ total real income (i.e. wage, money transfers and profits). Within this framework, price targeting is shown to reduce the macroeconomic inefficiencies associated with monopolistic competition. The paper also shows that the standard approximation, that no single price or wage setter can affect nominal aggregates, is a good approximation provided, (a) at least a few hundreds of such large firms exist and more significantly (b) labour markets are decentralized or wage centralization is very low.
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Suggested Citation

  • George J. Bratsiotis, 2005. "Influential Price and Wage Setters, Monetary Policy and Real Effects," Economics Discussion Paper Series 0540, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:0540
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    1. Bratsiotis, George J., 2008. "Influential price and wage setters, monetary policy and real effects," European Journal of Political Economy, Elsevier, vol. 24(2), pages 503-517, June.
    2. James, Jonathan G. & Lawler, Phillip, 2010. "Macroeconomic shocks, unionized labour markets and central bank disclosure policy: How beneficial is increased transparency?," European Journal of Political Economy, Elsevier, vol. 26(4), pages 506-516, December.
    3. George J. Bratsiotis, 2008. "Cross price effects, nominal rigidity and endogenous persistence," Economics Bulletin, AccessEcon, vol. 5(29), pages 1-6.
    4. repec:ebl:ecbull:v:5:y:2008:i:29:p:1-6 is not listed on IDEAS
    5. Di Bartolomeo Giovanni & Tirelli Patrizio, 2016. "Public finance and the optimal inflation rate," wp.comunite 00128, Department of Communication, University of Teramo.

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