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Unemployment Benefits as a Substitute for a Conservative Central Banker

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  • Rafael Di Tella

    (Harvard Business School, Harvard University, London)

  • Robert MacCulloch

    (Tanaka Business School, Imperial College, London)

Abstract

In the many years since their introduction, positive theories of inflation have rarely been tested. This paper documents a negative relationship between inflation and the welfare state (proxied by the parameters of the unemployment benefit program) that is to be expected in such theories. Because unemployment benefits make the monetary authority less concerned about the plight of the unemployed, building a welfare state has a similar effect to appointing a conservative central banker. The relationship holds in a panel of 20 OECD countries over the period 1961-1992, a region where Romer finds no evidence of commitment problems. It holds controlling for country and time fixed effects, country specific time trends, other covariates, and using a decadal panel. Interpreted as causal, the estimated effect is economically large: a 1-standard deviation decrease in benefit duration is predicted to add 1.4 percentage points onto inflation, or 31% of the standard deviation in inflation. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Rafael Di Tella & Robert MacCulloch, 2004. "Unemployment Benefits as a Substitute for a Conservative Central Banker," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 911-922, November.
    • Handle: RePEc:tpr:restat:v:86:y:2004:i:4:p:911-922
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    Cited by:

    1. Kuhn, Andreas, 2009. "In the Eye of the Beholder: Subjective Inequality Measures and the Demand for Redistribution," IZA Discussion Papers 4360, Institute of Labor Economics (IZA).
    2. Christoph S. Weber, 2020. "The unemployment effect of central bank transparency," Empirical Economics, Springer, vol. 59(6), pages 2947-2975, December.
    3. Andreas Kuhn, 2009. "In the eye of the beholder: subjective inequality measures and the demand for redistribution," IEW - Working Papers 425, Institute for Empirical Research in Economics - University of Zurich.
    4. Rafael Di Tella & Robert MacCulloch, 2007. "Happiness, Contentment and Other Emotions for Central Banks," NBER Working Papers 13622, National Bureau of Economic Research, Inc.
    5. Andreas Kuhn, 2009. "In the Eye of the Beholder: Subjective Inequality Measures and the Demand for Redistribution," NRN working papers 2009-14, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
    6. Lina El-Jahel & Robert MacCulloch & Hamed Shafiee, 2020. "How does Monetary Policy affect welfare?," Working Papers 20_06, Motu Economic and Public Policy Research.

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