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Central Bank Independence, Centralized Wage Bargaining and Price Stability in a Monetary Policy Game

Hedblom, Daniel (2008)
Department of Economics
Abstract
This paper addresses the usefulness of studying the interplay between central bank independence and centralized wage bargaining in the context of a repeated monetary policy game. Conventional macroeconomic wisdom suggests that because of increased credibility and the possibility to overcome inflationary bias, increased central bank independence has a negative effect on inflation rates. However, the benefits of increased central bank independence have lately been called into question. This paper seeks to answer whether the degree of CWB may affect the equilibrium in the monetary policy game and thereby also shed some light on the effect of CBI. The theoretical analysis considers two potential effects of CWB in the monetary policy game. The... (More)
This paper addresses the usefulness of studying the interplay between central bank independence and centralized wage bargaining in the context of a repeated monetary policy game. Conventional macroeconomic wisdom suggests that because of increased credibility and the possibility to overcome inflationary bias, increased central bank independence has a negative effect on inflation rates. However, the benefits of increased central bank independence have lately been called into question. This paper seeks to answer whether the degree of CWB may affect the equilibrium in the monetary policy game and thereby also shed some light on the effect of CBI. The theoretical analysis considers two potential effects of CWB in the monetary policy game. The first stems from union inflation-aversion and the other from the effect of non-unionized wage bargainers. These effects are found opposing, which means that there is a possibility for a hump-shaped relationship between CWB and inflation. A small empirical study of 19 countries over three time-periods is also conducted. CBI turns out to have a negative effect on inflation. The hypothesis of a hump-shaped relationship between CWB and inflation also gains some support. (Less)
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@misc{1337013,
  abstract     = {This paper addresses the usefulness of studying the interplay between central bank independence and centralized wage bargaining in the context of a repeated monetary policy game. Conventional macroeconomic wisdom suggests that because of increased credibility and the possibility to overcome inflationary bias, increased central bank independence has a negative effect on inflation rates. However, the benefits of increased central bank independence have lately been called into question. This paper seeks to answer whether the degree of CWB may affect the equilibrium in the monetary policy game and thereby also shed some light on the effect of CBI. The theoretical analysis considers two potential effects of CWB in the monetary policy game. The first stems from union inflation-aversion and the other from the effect of non-unionized wage bargainers. These effects are found opposing, which means that there is a possibility for a hump-shaped relationship between CWB and inflation. A small empirical study of 19 countries over three time-periods is also conducted. CBI turns out to have a negative effect on inflation. The hypothesis of a hump-shaped relationship between CWB and inflation also gains some support.},
  author       = {Hedblom, Daniel},
  keyword      = {inflation,Panel Data,monetary policy,Central Bank Independence,Game Thoery,Centrailzation of Wage Bargaining,Reputational Equilibrium,Credibility,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {Central Bank Independence, Centralized Wage Bargaining and Price Stability in a Monetary Policy Game},
  year         = {2008},
}