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Institute for International Economic Studies, Stockholm University Seminar Papers, Institute for International Economic Studies, Stockholm University

No 708:
The Interaction Between Labor Market Policy and Monetary Policy: An Analysis of Time Inconsistency Problems

Åsa Johansson ()

Abstract: This paper studies the interaction between time inconsistency problems in labor market policy and monetary policy. When both policies are discretionary, there is a positive inflation bias, whereas the bias in labor market programs may be either positive or negative. A commitment of labor market programs to zero increases inflation, as compared to the case when both labor market policy and monetary policy are discretionary. Delegation of labor market policy to a liberal labor market board may improve the discretionary outcome, even if labor market programs crowd out regular employment. A conservative central bank always reduces the social loss, even when monetary policy interacts with labor market policy.

Keywords: TBA; (follow links to similar papers)

JEL-Codes: J00; (follow links to similar papers)

40 pages, May 16, 2002

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