Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy

Peter Skott

Oxford Economic Papers, 1997, vol. 49, issue 4, 609-22

Abstract: Stylized models of the policy game between monetary policymakers and the private sector have suggested that disciplinary policy regimes suffer from an inherent inflationary bias and that precommitment to a target rate of inflation may be desirable. This paper shows that, in the presence of labor unions, the monetary policy game can lead to radically different results: a central bank that is completely indifferent to the level of inflation may obtain outcomes with high employment rates and zero inflation while 'prudent,' inflation-averse central banks generate stagflation with positive inflation and low rates of employment. Copyright 1997 by Royal Economic Society.

Date: 1997
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