Abstract
A model of union wage setting behavior is developed in which monetary stabilization policy is generally effective, at least in the short-run. Because of asymmetries in union objective functions, their choice of nominal wage rates depends on the confidence they have in their forecasts of the price level. This confidence is represented by the variance of the forecast. Since monetary changes, even if fully anticipated, can affect the variance of optimal forecasts, this allows the monetary authorities to systematically influence real wages, and output, with the result that policy is effective in the short-run. In the long-run stabilization policy is likely to lead to increasing levels of monetary and price instability. Copyright 1991 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia
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