Unions Power, Collective Bargaining and Optimal Monetary

We study Ramsey policies and optimal monetary policy rules in a DNK model with unionized labour markets. Collective wage bargaining and unions’ monopoly power amplify inefficient employment fluctuations. The optimal monetary policy must trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions’ monopoly power. In this context the monetary authority uses inflation as a tax on unions’ rents and as a mean for indirect redistribution. Results are robust to the introduction of imperfect insurance on income shocks. The optimal monetary policy rule targets unemployment alongside inflation.