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The Inflation Target and the Structure of Labour Markets: Implications for Common Monetary Policy

  • Kilponen, Juha


    (Bank of Finland Research)

Both the optimal inflation target and the optimal degree of output stabilization are found to be conditional on the prevailing wage bargaining structure. If monopolistic wage setters act as strategic leaders of the monetary policy game, an explicit inflation targeting regime removes inflation bias from monetary policy, but does not remove the trade-off related to average level of output and output stabilization. In contrast to usual results on inflation targeting, appointing a central banker who is more conservative than the government leads to welfare gains for society. If centralization within the national labor markets increases in the common monetary policy area, the monetary policy game with regard to the European Central Bank might be conducted under the strategic leadership of trade union confederations. This leads to a Pareto loss.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 7/1999.

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Length: 31 pages
Date of creation: 14 Jun 1999
Date of revision:
Handle: RePEc:hhs:bofrdp:1999_007
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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  1. Persson, Torsten & Tabellini, Guido, 1997. "Political Economics and Macroeconomic Policy," CEPR Discussion Papers 1759, C.E.P.R. Discussion Papers.
  2. Hafiz A. Akhand, 1992. "Policy Credibility and Inflation in a Wage-Setting Game," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 407-19, May.
  3. Canzoneri, Matthew B. & Henderson, Dale W., 1988. "Is sovereign policymaking bad?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 93-140, January.
  4. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  6. Velasco, A. & Guzzo, V., 1998. "The Case for a Populist Central Banker," Working Papers 98-26, C.V. Starr Center for Applied Economics, New York University.
  7. Driffill, John, 1985. " Macroeconomic Stabilization Policy and Trade Union Behaviour as a Repeated Game," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 300-326.
  8. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment: Theory and Evidence," Papers 332, Banca Italia - Servizio di Studi.
  9. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  10. Svensson, Lars E O, 1999. "Monetary Policy Issues for the Eurosystem," CEPR Discussion Papers 2197, C.E.P.R. Discussion Papers.
  11. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  12. Cubitt, Robin P, 1992. "Monetary Policy Games and Private Sector Precommitment," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 513-30, July.
  13. Bleaney, Michael, 1996. "Central Bank Independence, Wage-Bargaining Structure, and Macroeconomic Performance in OECD Countries," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 20-38, January.
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