The Welfare Effect of Foreign Monetary Conservatism with Non-Atomistic Wage Setters

This paper extends the closed economy analysis of strategic interaction between labor unions and the monetary authority in Lippi (REStud 2003) to a two-country open economy framework. It sheds light on the real effect of foreign central bank conservatism, which — through a strategic mechanism that operates via the terms of trade between the two independent monetary policy makers — entails wage moderation. The impact of domestic central bank conservatism hinges instead on the combination of three strategic effects