Policy Credibility and Inflation in a Wage-Setting Game
This paper combines the conventional monetary policy game with a wage-setting game among several noncooperating wage setters (each with some monopoly power). The inflationary bias in market economies is explained in terms of the wage-competition bias. This bias does not disappear even when the central bank communicates its policy goals precisely and credibly. In a policy game with several noncooperative monopolistic wage setters and a central bank, if discretionary policy is interpreted as wage setters' being Stackelberg leaders relative to the central bank, a discretionary policy leads to both higher inflation and lower output.
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Volume (Year): 25 (1992)
Issue (Month): 2 (May)
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