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Openness, Centralized Wage Bargaining, and Inflation

  • Joseph P. Daniels


    (Center for Global and Economic Studies, Marquette University)

  • Farrokh Nourzad


    (Department of Economics, Marquette University)

  • David D. VanHoose


    (Hanmaker School of Business, Baylor University)

This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase at low degrees of wage centralization but then, as wage centralization increases, results in an inflation dropoff; (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence; and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970-1999 provides generally strong and robust empirical support for all three of these predictions.

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Paper provided by Marquette University, Center for Global and Economic Studies and Department of Economics in its series Working Papers and Research with number 0505.

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Length: 42 pages
Date of creation: Jan 2005
Date of revision:
Publication status: Published in European Journal of Political Economy, December 2006, pages 969-968
Handle: RePEc:mrq:wpaper:0505
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