The welfare effect of foreign monetary conservatism with non-atomistic wage setters

This paper sheds light on the real effects of foreign central bank’s degree of inflation aversion in presence of non-atomistic wage setters. It extends the Lippi’s (2003) framework to an open economy and identifies the key strategic mechanisms between monetary policy and wage-setting decisions so as to assess the real effects of domestic and foreign policy makers’ aversion to inflation. A main finding is that foreign central bank’s aversion to inflation always increases employment. The impact of domestic central bank’s aversion to inflation instead depends on the combination of three strategic effects.