Unemployment persistence, wage indexing and central bank independence
This paper examines the effect of wage indexation on the optimal degree of central bank conservativeness in a dynamic economy. In particular, we find that when unemployment persists, wage indexation is inflationary as it lowers the will of the central banker to fight inflation. Furthermore, we show that there is a positive relationship between the degree of the monetary authorities'' discount factor and inflation. We conclude that it is optimal to delegate monetary policy to an independent and conservative central banker.
Volume (Year): 29 (2009)
Issue (Month): 2 ()
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