Research Discussion Papers, Bank of Finland
The Inflation Target and the Structure of Labour Markets: Implications for Common Monetary Policy
Abstract: 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.
Keywords: monetary policy; labor markets; European Monetary Union; inflation targeting; (follow links to similar papers)
31 pages, June 14, 1999
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