Monetary policy, central bank objectives, and social welfare with strategic wage setting

Abstract

The paper examines the implications of strategic wage-setting behaviour by an inflation-averse monopoly union for the appropriate specification of central bank objectives. Our principal findings are as follows. First, the optimal setting of the parameters of the central bank's objective function differ in a significant way according to the relative timing of monetary policy and wage determination. Second, the ability of the central bank to precommit to a particular setting of monetary policy does not confer any welfare benefits. Third, we find little support in this context for the notion that placing monetary policy in the hands of a conservative central bank will improve social welfare.