NAIRU, capital formation and monetary policy

The strategic interaction between central bank and trade unions is integrated into standard medium run general equilibrium models with imperfect competition in good and labour markets. The main results are: (i) not fully indexed social expenditure, plausible in the short and medium run, produce money nonneutrality, but the opposite holds in the long run, when this nominal rigidity is removed; (ii) Rogoff’s (1985) conservative central banker may decrease inflation and unemployment; (iii) insufficient capital accumulation (Rowthorn, 1999a; 1999b) is not a generally plausible explanation of European unemployment, but it is subject to milder conditions than that based on a capital-using shift in technology (Blanchard, 1997); (iv) with balanced government budgets, consistent monetary and social policies may achieve a zero “Desired Inflation Rate of Unemployment” (DIRU); (v) in the present European context the minimisation of DIRU would require to enhance social policies.