Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy
Stylized models of the policy game between monetary policymakers and the private sector have suggested that disciplinary policy regimes suffer from an inherent inflationary bias and that precommitment to a target rate of inflation may be desirable. This paper shows that, in the presence of labor unions, the monetary policy game can lead to radically different results: a central bank that is completely indifferent to the level of inflation may obtain outcomes with high employment rates and zero inflation while 'prudent,' inflation-averse central banks generate stagflation with positive inflation and low rates of employment. Copyright 1997 by Royal Economic Society.
Volume (Year): 49 (1997)
Issue (Month): 4 (October)
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