Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence

A. Cukierman, F. Lippi

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper proposes a conceptual framework to investigate the effects of central bank independence, of the degree of centralization of wage bargaining and of the interaction between those institutional variables, on real wages, unemployment and inflation, in a framework in which unions are averse to inflation. This aversion moderates unions wage demands as they attempt to induce the central bank to inflate at a lower rate. An increase in the degree of centralization of wage bargaining (a decrease in the number of unions) triggers two opposite effects on real wages, unemployment and inflation. It reduces the substitutability between the labor of different unions and therefore the degree of effective competition between them. This "reduced competition effect" raises real wages, unemployment and in°ation. But the decrease in the number of unions also strengthens the moderating effect of in°ationary fears on the real wage demands of each union. This "strategic effect" lowers real wages, unemployment and inflation. For sufficiently inflation averse unions the interaction between those two effects produces a Calmfors-Driffill type relation between real wages and centralization. The paper analyzes the effects of central bank independence on the position and the shape of this relation, as well as on inflation and unemployment. The paper features two mechanisms, one of which is novel, through which monetary institutions have real effects. The paper's framework implies that social welfare is maximized when the central bank is ultra liberal. This result is critically assessed. Empirical evaluation of some of the theoretical implications, using data from nineteen developed economies, is for the most part supportive of those implications.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages42
Volume1998-116
Publication statusPublished - 1998

Publication series

NameCentER Discussion Paper
Volume1998-116

Fingerprint

Unemployment
Centralization
Central bank independence
Inflation
Real wages
Wage bargaining
Central bank
Interaction
Strategic effect
Conceptual framework
Substitutability
Wages
Institutional variables
Moderating effect
Labor
Social welfare
Trigger
Empirical evaluation

Keywords

  • central banks
  • independence
  • wages
  • bargaining
  • inflation
  • unemployment

Cite this

Cukierman, A., & Lippi, F. (1998). Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence. (CentER Discussion Paper; Vol. 1998-116). Tilburg: Macroeconomics.
Cukierman, A. ; Lippi, F. / Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence. Tilburg : Macroeconomics, 1998. (CentER Discussion Paper).
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Cukierman, A & Lippi, F 1998 'Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence' CentER Discussion Paper, vol. 1998-116, Macroeconomics, Tilburg.

Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence. / Cukierman, A.; Lippi, F.

Tilburg : Macroeconomics, 1998. (CentER Discussion Paper; Vol. 1998-116).

Research output: Working paperDiscussion paperOther research output

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AB - This paper proposes a conceptual framework to investigate the effects of central bank independence, of the degree of centralization of wage bargaining and of the interaction between those institutional variables, on real wages, unemployment and inflation, in a framework in which unions are averse to inflation. This aversion moderates unions wage demands as they attempt to induce the central bank to inflate at a lower rate. An increase in the degree of centralization of wage bargaining (a decrease in the number of unions) triggers two opposite effects on real wages, unemployment and inflation. It reduces the substitutability between the labor of different unions and therefore the degree of effective competition between them. This "reduced competition effect" raises real wages, unemployment and in°ation. But the decrease in the number of unions also strengthens the moderating effect of in°ationary fears on the real wage demands of each union. This "strategic effect" lowers real wages, unemployment and inflation. For sufficiently inflation averse unions the interaction between those two effects produces a Calmfors-Driffill type relation between real wages and centralization. The paper analyzes the effects of central bank independence on the position and the shape of this relation, as well as on inflation and unemployment. The paper features two mechanisms, one of which is novel, through which monetary institutions have real effects. The paper's framework implies that social welfare is maximized when the central bank is ultra liberal. This result is critically assessed. Empirical evaluation of some of the theoretical implications, using data from nineteen developed economies, is for the most part supportive of those implications.

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Cukierman A, Lippi F. Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence. Tilburg: Macroeconomics. 1998. (CentER Discussion Paper).