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Oxford Economic Papers Advance Access published online on May 15, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp011
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© Oxford University Press 2009 All rights reserved

Monopolistic unions, Brainard uncertainty, and optimal monetary policy

Timo Henckel

Centre for Applied Macroeconomic Analysis, Australian National University, Canberra ACT 0200, Australia; e-mail: timo.henckel{at}anu.edu.au

JEL classifications: E52, J51


  Abstract

Some authors have argued that multiplicative uncertainty may benefit society as the cautionary motive reduces the inflation bias. However, when there are non-atomistic wage setters, higher multiplicative uncertainty may raise the wage premium and unemployment and thus reduce welfare. Furthermore, since central bank preferences also affect the wage premium, delegating policy to an independent central banker with an optimal degree of conservatism cannot deliver a second-best outcome.


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