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Openness, Centralized Wage Bargaining, and Inflation

Joseph Daniels, Farrokh Nourzad () and David VanHoose
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Farrokh Nourzad: Department of Economics, Marquette University

No 505, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase at low degrees of wage centralization but then, as wage centralization increases, results in an inflation dropoff; (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence; and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970-1999 provides generally strong and robust empirical support for all three of these predictions.

Keywords: Openness; Centralized wage setting; inflation (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Published in European Journal of Political Economy, December 2006, pages 969-968

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