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Unemployment persistence, wage indexing and central bank independence

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  • Tilemahos Efthimiadis

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    Abstract

    This paper examines the effect of wage indexation on the optimal degree of central bank conservativeness in a dynamic economy. In particular, we find that when unemployment persists, wage indexation is inflationary as it lowers the will of the central banker to fight inflation. Furthermore, we show that there is a positive relationship between the degree of the monetary authorities'' discount factor and inflation. We conclude that it is optimal to delegate monetary policy to an independent and conservative central banker.

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    File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I2-P3.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 29 (2009)
    Issue (Month): 2 ()
    Pages: 523-529

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    Handle: RePEc:ebl:ecbull:eb-09-00088

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    Related research

    Keywords: unemployment; persistence; central bank; wage indexing;

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    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
    2. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
    3. Hutchison, M M & Walsh, C E, 1998. "The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(448), pages 703-25, May.
    4. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 65(259), pages 327-45, August.
    5. Mourmouras, Iannis A., 1997. "On Wage Indexing, Policy Credibility and Inflation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 19(1), pages 19-30, January.
    6. Lockwood, Ben & Philippopoulos, Apostolis, 1994. "Insider Power, Unemployment Dynamics and Multiple Inflation Equilibria," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 61(241), pages 59-77, February.
    7. Mourmouras, Iannis A, 1997. "Monetary Policy Delegation and Optimal Wage Indexation," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 303-07, October.
    8. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(2), pages 221-235, April.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
    10. Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 95-140, December.
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