Stagflationary Bias and the Interaction of Monetary Policy and Wages in a Unionized Economy

Robin Cubitt

Public Choice, 1997, vol. 93, issue 1-2, 165-78

Abstract: The paper investigates the claim of Gylfason and Lindbeck (1994) that a stagflationary bias arises from the interaction between monetary policymaking and wage-setting if, among other things, the government and unions share a concern for inflation. It uses a game theoretic model of this interaction, in which the government plays an economy-wide union. Though simple, this nests several other models as special cases. In that corresponding to Gylfason and Lindbeck's model, the factors which they identify are shown to be sufficient for stagflationary bias, in a specified sense. However, for the union to care about inflation is not a necessary condition. The main result of the paper concerns the more general model. It establishes a set of necessary and sufficient conditions for stagflationary bias, as previously defined. These conditions do not include a shared concern for inflation. The paper comments briefly on the significance of this result for stagflation and economic modeling. Copyright 1997 by Kluwer Academic Publishers

Date: 1997
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