Monetary Policy and Nominal Rigidities Under Low Inflation

30 Pages Posted: 11 Jul 2001

See all articles by Steinar Holden

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 2001

Abstract

In most European countries, money wages are given in collective agreements or individual employment contracts, and the employer cannot unilaterally cut wages, even after the expiration of a collective agreement. Ceteris paribus, workers have a stronger bargaining position when they try to prevent a cut in money wages. If inflation is so low that some money wages have to be cut, workers' stronger bargaining position requires higher unemployment in equilibrium. However, inflation is more stable when money wage rigidity binds, providing an incentive for monetary policy makers to choose a low target for inflation, which is easier to fulfil.

Keywords: Nominal Wage Rigidity, Labour Contracts, Monetary Policy, Inflation, Equilibrium Unemployment

JEL Classification: J5, J6, E31, E52, K31

Suggested Citation

Holden, Steinar, Monetary Policy and Nominal Rigidities Under Low Inflation (May 2001). Available at SSRN: https://ssrn.com/abstract=273357 or http://dx.doi.org/10.2139/ssrn.273357

Steinar Holden (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 85 51 56 (Phone)
+47 22 85 50 35 (Fax)

HOME PAGE: http://folk.uio.no/~sholden/

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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