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Inflation Targeting Is a Success, So Far: 100 Years of Evidence from Swedish Wage Contracts

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  • Jonung, Lars
  • Fregert, Klas

Abstract

We evaluate the Swedish inflation targeting regime adopted in 1993−1995 using a novel approach based on a unique data set on the characteristics of collective wage agreements between 1908 and 2008. We find that the inflation targeting regime of 1995−2008 stands out as an exceptionally stable policy regime as judged by the willingness of wage contract-makers to repeatedly commit to three-year non-indexed wage agreements. Inflation targeting gained instant credibility in the sense that the labor market organizations entered long-term wage agreements at the same time as this new regime was announced. Inflation targeting has thus reduced macroeconomic uncertainty compared to previous regimes adopted in Sweden, including the gold standard before and after World War I, the price level targeting of the 1930s, the Bretton Woods period of fixed exchange rates. As judged by the reactions of the labor market participants, inflation targeting in Sweden is a success¯at least so far. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-31
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): 31 ()
Pages: 1-25

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Handle: RePEc:zbw:ifweej:7398

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Keywords: Inflation targeting; policy regime; contract length; wage indexation; Lucas critique; Sweden; credibility;

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  1. Berg, Claes & Jonung, Lars, 1999. "Pioneering price level targeting: The Swedish experience 1931-1937," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 525-551, June.
  2. Rose, Andrew K. & Mihov, Ilian, 2008. "Is Old Money Better than New? Duration and Monetary Regimes," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(13), pages 1-24.
  3. Robert Rich & Joseph Tracy, 2004. "Uncertainty and Labor Contract Durations," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 270-287, February.
  4. Horn, Henrik & Persson, Torsten, 1988. "Exchange rate policy, wage formation and credibility," European Economic Review, Elsevier, vol. 32(8), pages 1621-1636, October.
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  7. Lin, Shu & Ye, Haichun, 2007. "Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2521-2533, November.
  8. Murphy, Kevin J., 2000. "What effect does uncertainty have on the length of labor contracts?," Labour Economics, Elsevier, vol. 7(2), pages 181-201, March.
  9. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 129-136, 03.
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  13. McCallum, John, 1983. "Stabilization Policy and Endogenous Wage Stickiness," American Economic Review, American Economic Association, vol. 73(3), pages 414-19, June.
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  17. Groth, Charlotta & Johansson, Asa, 2004. "Bargaining structure and nominal wage flexibility," European Economic Review, Elsevier, vol. 48(6), pages 1349-1365, December.
  18. Lennart Erixon, 2008. "The Swedish third way: an assessment of the performance and validity of the Rehn--Meidner model," Cambridge Journal of Economics, Oxford University Press, vol. 32(3), pages 367-393, May.
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Citations

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Cited by:
  1. Erwan Gautier & Denis Fougère & Sanvi Avouyi-Dovi, 2009. "Les négociations salariales en France : une analyse à partir de données d’entreprises (1994 ‑ 2005)," Économie et Statistique, Programme National Persée, vol. 426(1), pages 29-65.
  2. Holmlund, Bertil, 2012. "Wage and Employment Determination in Volatile Times: Sweden 1913-1939," IZA Discussion Papers 6509, Institute for the Study of Labor (IZA).
  3. Sanvi Avouyi-Dovi & Denis Fougère & Erwan Gautier, 2013. "Wage Rigidity, Collective Bargaining, and the Minimum Wage: Evidence from French Agreement Data," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1337-1351, October.
  4. Creel, Jérôme & Hubert, Paul, 2012. "Constrained discretion in Sweden," Research in Economics, Elsevier, vol. 66(1), pages 33-44.
  5. Erixon, Lennart, 2011. "Under the influence of traumatic events, new ideas, economic experts and the ICT revolution - the economic policy and macroeconomic performance of Sweden in the 1990s and 2000s," Research Papers in Economics 2011:25, Stockholm University, Department of Economics.
  6. Lars Jonung, 2010. "Financial Crisis and Crisis Management in Sweden. Lessons for Today," Working Papers id:3067, eSocialSciences.
  7. Lars Jonung & Jaakko Kiander & Pentti Vartia, 2008. "The great financial crisis in Finland and Sweden - The dynamics of boom, bust and recovery, 1985-2000," European Economy - Economic Papers 350, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. Jean-Paul Fitoussi & Paul Hubert, 2010. "Monetary Policy, Imperfect Information and the Expectations Channel," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.

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