The Inflation Target and the Structure of Labour Markets: Implications for Common Monetary Policy

31 Pages Posted: 14 Oct 2007

Date Written: June 14, 1999

Abstract

Both the optimal inflation target and the optimal degree of output stabilization are found to be conditional on the prevailing wage bargaining structure. If monopolistic wage setters act as strategic leaders of the monetary policy game, an explicit inflation targeting regime removes inflation bias from monetary policy, but does not remove the trade-off related to average level of output and output stabilization. In contrast to usual results on inflation targeting, appointing a central banker who is more conservative than the government leads to welfare gains for society. If centralization within the national labor markets increases in the common monetary policy area, the monetary policy game with regard to the European Central Bank might be conducted under the strategic leadership of trade union confederations. This leads to a Pareto loss.

Keywords: monetary policy, labor markets, European Monetary Union, inflation targeting

Suggested Citation

Kilponen, Juha, The Inflation Target and the Structure of Labour Markets: Implications for Common Monetary Policy (June 14, 1999). Bank of Finland Research Discussion Paper No. 7/1999. Available at SSRN: https://ssrn.com/abstract=1021248 or http://dx.doi.org/10.2139/ssrn.1021248

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

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