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The Political Economy of Inflation: Bargaining Structure or Central Bank Independence?

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  • Iversen, Torben

Abstract

The causes of inflation are commonly analyzed as the function of either the organization of wage bargaining or the independence of the central bank. Although these explanations are widely treated as competing, recent evidence suggests that there may be merit to both arguments. This paper presents a game-theoretic model of wage bargaining and monetary policymaking that shows why the two institutional causes are not only complementary but elements of a more encompassing logic. The empirical superiority of this synthesizing model is demonstrated by reanalyzing data used in F. Al-Marhubi and T. D. Willett (1995) and by presenting new evidence. Copyright 1999 by Kluwer Academic Publishers

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  • Iversen, Torben, 1999. "The Political Economy of Inflation: Bargaining Structure or Central Bank Independence?," Public Choice, Springer, vol. 99(3-4), pages 237-258, June.
  • Handle: RePEc:kap:pubcho:v:99:y:1999:i:3-4:p:237-58
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    References listed on IDEAS

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    1. James M. Buchanan, 1954. "Individual Choice in Voting and the Market," Journal of Political Economy, University of Chicago Press, vol. 62, pages 334-334.
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    Cited by:

    1. Hein, Eckhard, 2001. "Institutions and macroeconomic performance: Central bank independence, labour market institutions and the perspectives for inflation and employment in the European Monetary Union," WSI Working Papers 95, The Institute of Economic and Social Research (WSI), Hans-Böckler-Foundation.
    2. Moïse Sidiropoulos & Eleftherios Spyromitros, 2006. "Fiscal Policy in a Monetary Union Under Alternative Labour-Market Structures," Working Papers of BETA 2006-25, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    3. Vaubel, Roland, 1999. "The Future of the Euro : A Public Choice Perspective," Discussion Papers 570, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
    4. Alison Johnston, 2011. "The Revenge of Baumol's Cost Disease?: Monetary Union and the Rise of Public Sector Wage Inflation," LEQS – LSE 'Europe in Question' Discussion Paper Series 32, European Institute, LSE.
    5. Johnston, Alison, 2011. "The revenge of Baumol's cost disease?: monetary union and the rise of public sector wage inflation," LSE Research Online Documents on Economics 53280, London School of Economics and Political Science, LSE Library.
    6. Daniels, Joseph P. & Nourzad, Farrokh & VanHoose, David D., 2006. "Openness, centralized wage bargaining, and inflation," European Journal of Political Economy, Elsevier, vol. 22(4), pages 969-988, December.
    7. Robert Franzese, 2001. "Strategic Interactions of Monetary Policymakers and Wage/Price Bargainers: A Review with Implications for the European Common-Currency Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(4), pages 457-486, December.
    8. Kari Heimonen & Aleksandra Maslowska-Jokinen, 2014. "Central bank independence and sovereign debt crisis. Any link?," Discussion Papers 93, Aboa Centre for Economics.

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