Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1999:23: Central Bank Conservatism and Labor Market Reform

Henrik Jordahl and Stefan Laséen ()
Additional contact information
Henrik Jordahl: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Stefan Laséen: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: How does central bank conservatism affect labor market reform? In this paper we examine the economic forces at work. An increase in conservatism triggers two opposite effects. It reduces the inflation bias of discretionary monetary policy and hence the benefits of a reform. It also increases unemployment variability, which increases the precautionary benefits of a reform. In combination, the two effects produce a u-shaped relation between conservatism and labor market reform. An empirical investigation provides evidence consistent with this prediction.

Keywords: Central bank independence; labor market reform; credibility; flexibility; inflation; unemployment; rigidities

JEL-codes: E58; E63; J38

26 pages, December 1, 1999

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1999wp23.pdf PDF-file Original version
1999wp23nv.pdf PDF-file Revised version

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Published as
Henrik Jordahl and Stefan Laséen, (2005), 'Central Bank Conservatism and Labor Market Regulation', European Journal of Political Economy, vol 21, pages 345-363

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