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The issue of instability in a simple policy game between the central bank and the representative union

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  • Di Bartolomeo G.
  • Pauwels W.

Abstract

In the recent economic literature the independence of the central bank is often considered to be one of the most effective guarantees to archieve price stability. A strong theoretical basis of this proposition is that the monetary policy delegation given to an independent central bank is an optimal instrument to avoid the time inconsistency problem of monetary policy. This paper investigates the stability properties of this solution in a simple game in which the private sector (i.e. the trade unions) and the public sector (i.e. the dentral bank) simultaneously interact. A representative monopoly union is considered, and – in line with the recent economic debate – two types of unions are investigated: i) the standard micro-founded trade union; ii) the inflation-averse trade union. In both cases, we find that the requirement that the Nash equilibrium be stable imposes a limit to the conservativeness of the central bank. Instability of the nash equilibrium reveals a strategic co-ordination failure between the public and the private sector.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2002009.

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Length: 20 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:ant:wpaper:2002009

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Cited by:
  1. Caeyers B. & Pauwels W., 2006. "Corporatism and Macroeconomic Stabilization Policies," Working Papers 2006035, University of Antwerp, Faculty of Applied Economics.
  2. Acocella, Nicola & Di Bartolomeo, Giovanni & Hibbs Jr., Douglas A., 2004. "Labor market regimes and the effects of monetary policy," Working Papers in Economics 145, University of Gothenburg, Department of Economics, revised 22 Apr 2005.
  3. N. Acocella & G. Bartolomeo & Andrew Hallett, 2006. "Controllability in Policy Games: Policy Neutrality and the Theory of Economic Policy Revisited," Computational Economics, Society for Computational Economics, vol. 28(2), pages 91-112, September.
  4. Nicola Acocella & Giovanni Di Bartolomeo, 2002. "Sindacati, non neutralitˆ della moneta e giochi di politica economica," Moneta e Credito, Economia civile, vol. 55(219), pages 263-277.

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