Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy

Abstract

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Unions, Wage Setting and Monetary Policy Uncertainty

“…Focusing on the characteristics of the central bank, Skott (1997), Sorensen (1991), Grüner and Hefeker (1999), Guzzo and Velasco (1999), and Cukierman andLippi (1999, 2001) Calmfors and Driffill (1988) can be confirmed but that this relation disappears at higher levels of central bank independence. Chortareas et al (2001) analyze empirically a specific type of transparency, namely the publication of inflation forecasts and other forward-looking indicators.…”

Openness, centralized wage bargaining, and inflation

“…As an analytical simplification, we define ߨ ‫ؠ‬ ‫‬ െ ‫‬ ିଵ and normalize last period's price level at zero, so that ߨ ൌ ‫.‬ As in Cubitt (1992Cubitt ( , 1995, Skott (1997), Cukierman and Lippi (1999), we consider a setting in which firms and members of society who supply labor seek to minimize perceived employment and inflation losses Consequently, we assume, following Modigliani and Fischer (1986) and Fischer(1986), that wage setters care about inflation losses separately because of associated menu and various other costs and, further, as in Cukierman and Lippi (2001), that wage setters are concerned with inflation losses because their incomes, pensions, and other wealth are not fully indexed. In addition, it is commonplace in this literature-and we follow the literature in this regard below-to consider policymaking, and presumably societal, loss functions that incorporate differential concerns about employment and output versus inflation.…”

“…Only a segment of this body of research, however, has examined the interplay between centralized wage-bargaining structures and the equilibrium inflation rate under monetary policy discretion. Nevertheless, important contributions by Cubitt (1992Cubitt ( , 1995 and Skott (1997) have showed that centralization of wage bargaining can significantly influence the optimal policy choices of a central bank. Following up on this research, Soskice and Iversen (2000), Iversen (1999b), McHugh (2002), Guzzo and Velasco (1999), and Cukierman and Lippi (1999) have developed alternative frameworks for exploring the implications of increased wage-setting centralization for various macroeconomic variables, including inflation.…”

A Union‐bashing Model of Inflation Targeting

“…Accordingly, home production need not be equal to home demand. 29 The same would be true for a CES-type utility function. 30 However, in equilibrium, trade will be balanced.…”

“…Table 1 shows collective bargaining coverage for the private and public sector in selected European countries in 2001 (%): 1 Earlier literature, by focusing on inflation-averse unions, obtained the opposite result. See Skott (1997), Jensen (1997), Cukierman and Lippi (1999), Velasco (1999, 2002), Lippi (2002) and Jerger (2002). For a survey of both types of approaches, see Cukierman (2002).…”