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The issue of instability in a simple policy game between the central bank and the representative union

Listed author(s):
  • DI BARTOLOMEO, Giovanni
  • PAUWELS, Wilfried

In the recent economic literature the independence of the central bank is often considered to be one of the most effective guarantees to archieve price stability. A strong theoretical basis of this proposition is that the monetary policy delegation given to an independent central bank is an optimal instrument to avoid the time inconsistency problem of monetary policy. This paper investigates the stability properties of this solution in a simple game in which the private sector (i.e. the trade unions) and the public sector (i.e. the dentral bank) simultaneously interact. A representative monopoly union is considered, and – in line with the recent economic debate – two types of unions are investigated: i) the standard micro-founded trade union; ii) the inflation-averse trade union. In both cases, we find that the requirement that the Nash equilibrium be stable imposes a limit to the conservativeness of the central bank. Instability of the nash equilibrium reveals a strategic co-ordination failure between the public and the private sector.

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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2002009.

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Length: 20 pages
Date of creation: Feb 2002
Handle: RePEc:ant:wpaper:2002009
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