Scientific Monographs, Bank of Finland
No E:19/2000:
The Political Economy of Monetary Policy and Wage Bargaining : Theory and Econometric Evidence
Juha Kilponen ()
Abstract: In this study, the determination of optimal monetary
policy in unionised economies is considered from the new political economy
point of view. In the empirical part of the study it is shown that, in
addition to the institutional position of the central bank, labour market
institutions also matter for successful anti-inflationary policy. As
regards the position of the central bank, the results suggest that it is
important to distinguish between the political independence of the bank and
the independence of its personnel. Whereas the former helps to reduce
inflation, the latter seems to produce lower unemployment and wage
increases. As regards the effects of labour market institutions, the
results indicate that co-ordination in wage bargaining is generally
beneficial to inflation and employment, but that large differences between
union density and coverage rates lead to higher wage increases and
unemployment.
The theoretical part of the study considers interaction
between monetary policy and wage determination in unionised economies. It
is shown how the benefits of delegating monetary policy to an independent,
conservative central bank depend on the degree of centralisation or
decentralisation in wage determination. If unions act as leaders in the
“inflation game”, which could happen if wage contracts are of very long
duration, output in the economy remains inefficiently small. The size of
this problem is the greater the more accommodative monetary policy is and
the higher is the degree of centralisation in labour markets. It may be
beneficial for the unions to give up their leadership position in the
determination of inflation.
Keywords: monetary policy; credibility; labour markets; (follow links to similar papers)
JEL-Codes: E52; E58; J50; (follow links to similar papers)
174 pages, March 25, 2000
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