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Testing the impact of inflation targeting and central bank independence on labour market outcomes

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  • Anna Larsson Seim
  • Johnny Zetterberg

Abstract

We investigate the impact of inflation targeting and central bank independence on wage formation and unemployment using a panel of 20 OECD countries from 1982-2003. The results suggest that monetary institutions matter for wage formation. Real wages are on average higher under inflation targeting, in particular in economies with highly coordinated or centralized wage setting. This finding is in line with the strand of literature arguing that a liberal central bank may be more conducive to wage restraint than a conservative central bank if unions are inflation averse. Our results thus lend no support to the popular deterrence hypothesis. While inflation targeting seems to matter for wage formation, we find no evidence of effects on unemployment. Another key finding is that real wages tend to be lower in countries within the EMU. Copyright 2013 Oxford University Press 2012 All rights reserved, Oxford University Press.

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  • Anna Larsson Seim & Johnny Zetterberg, 2013. "Testing the impact of inflation targeting and central bank independence on labour market outcomes," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 240-267, April.
    • Handle: RePEc:oup:oxecpp:v:65:y:2013:i:2:p:240-267
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    File URL: http://hdl.handle.net/10.1093/oep/gps029
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    Cited by:

    1. Nasir, Muhammad Ali & Balsalobre-Lorente, Daniel & Huynh, Toan Luu Duc, 2020. "Anchoring inflation expectations in the face of oil shocks & in the proximity of ZLB: A tale of two targeters," Energy Economics, Elsevier, vol. 86(C).
    2. Ho-Chuan Huang & Chih-Chuan Yeh, 2014. "Inflation targeting on unemployment rates: a quantile treatment effect approach," Applied Economics Letters, Taylor & Francis Journals, vol. 21(7), pages 453-458, May.

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