JEL-Keywords: Monetary Policy, Unemployment, Inflation.
JEL-Classification: E24, E31, E52.

The paper considers the importance of wage formation for the policy mix in Europe. When monetary policy is committed to price stability, unit labour costs are a crucial factor in achieving this objective. Traditional Phillips curve or modern NAIRU models focus on labour market flexibility to achieve coherent wage developments because they take a short run perspective where the capital stock is fixed. However, in a long term perspective, the capital stock adjusts to profit opportunities and they depend on the portfolio choices of investors which are influenced by monetary policy. The time path of the price level depends then on a trend that is set by unit labour costs and a mean reverting profit mark-up that is dependent on capital costs. Monetary policy can become growth-supporting, if unit labour costs remain consistent with the central bank’s price objective.