This paper extends the closed economy analysis of strategic interaction between labor unions and the monetary authority in Lippi (REStud 2003) to a two-country open economy framework. It sheds light on the real effect of foreign central bank conservatism, which -- through a strategic mechanism that operates via the terms of trade between the two independent monetary policy makers -- entails wage moderation. The impact of domestic central bank conservatism hinges instead on the combination of three strategic effects.
Published in 2011 in: Journal of Money, Credit and Banking, v. 43, 8, pp. 1719-1734
