How does central bank conservatism affect labor market reform? In this paper we examine the economic forces at work. An increase in conservatism triggers two opposite effects. It reduces the inflation bias of discretionary monetary policy and hence the benefits of a reform. It also increases unemployment variability, which increases the precautionary benefits of a reform. In combination, the two effects produce a u-shaped relation between conservatism and labor market reform. An empirical investigation provides evidence consistent with this prediction.
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
1999:23.
Length: 26 pages Date of creation: 01 Dec 1999 Date of revision: Publication status: Published in European Journal of Political Economy, 2005, pages 345-363. Handle: RePEc:hhs:uunewp:1999_023
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Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
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