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Central Banks, Trade Unions and Reputation – Is there Room for an Expansionist Manoeuvre in the European Union?

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  • Pusch, Toralf
  • Heise, Arne

Abstract

It is now a few years since the introduction of the common currency, and Europe is still experiencing high unemployment. The conventional logic attributes this problem to strong trade unions and other flaws in the labour market. This article takes a different approach. Using a game theoretic model we look at the changes that occur if trade unions and the central bank have different options to choose from in a climate of uncertainty. In a singlestage game the most probable outcome is a high unemployment rate as high as the NAIRU. However, there is also a slight chance that a central bank might take the risk associated with employment expansion (if trade unions cooperate the risk pays off). Moreover, results change dramatically if the game is repeated. This allows for effects on the trade union’s reputation. It can be shown that this, in turn, improves the likelihood of employment expansion.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19719.

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Date of creation: 01 Sep 2008
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Handle: RePEc:pra:mprapa:19719

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Keywords: Central Bank; Reputation; Trade Unions;

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  1. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, vol. 43(7), pages 1317-1344, June.
  2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
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  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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  6. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence," Discussion Paper 1998-116, Tilburg University, Center for Economic Research.
  7. Rankin, Neil, 1995. "Is Delegating Half of Demand Management Sensible?," The Warwick Economics Research Paper Series (TWERPS) 443, University of Warwick, Department of Economics.
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  9. Jerger, Jurgen, 2002. "How strong is the case for a populist central banker? A note," European Economic Review, Elsevier, vol. 46(3), pages 623-632, March.
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  11. James K. Galbraith, 1997. "Time to Ditch the NAIRU," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 93-108, Winter.
  12. Heise, Arne, 2004. "Limitations to Keynesian demand management through monetary policy: whither Cartesian policy control," Working Papers on Economic Governance 14, University of Hamburg, Department of Socioeconomics.
  13. David Soskice & Torben Iversen, 2001. "Multiple Wage Bargaining Systems in the Single European Currency Area," Empirica, Springer, vol. 28(4), pages 435-456, December.
  14. Arne Heise, 2006. "Market Constellations and Macroeconomic Policymaking: Institutional Impacts on Economic Performance," Intereconomics: Review of European Economic Policy, Springer, vol. 41(5), pages 272-281, September.
  15. Soskice, David, 1990. "Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 36-61, Winter.
  16. Arne Heise, 2008. "European economic governance: what is it, where are we and where do we go?," International Journal of Public Policy, Inderscience Enterprises Ltd, vol. 3(1/2), pages 1-19.
  17. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  18. Jürgen Jerger & Oliver Landmann, 2006. "Dissecting the Two-Handed Approach: Who’s the Expert Hand For What?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 52(3), pages 50-70.
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