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