Inflation and Openness with Non-Atomistic Wage-Setters

20 Pages Posted: 25 Jan 2001

See all articles by Lilia Cavallari

Lilia Cavallari

Sapienza University of Rome - Department of Public Economics; University of Rome III - DIPES

Multiple version iconThere are 2 versions of this paper

Date Written: March 2000

Abstract

This paper analyses the impact of trade openness on inflation in a strategic framework characterized by monopolistic production in the domestic sector and unionized labour markets. By stressing the interplay between internal and external sources of economic distortion, we show that the economy's inflationary bias reduces up to a critical level of trade openness. Beyond this threshold, wage setters may be induced to behave more aggressively in open economies, leading to higher equilibrium inflation. Based on a regression analysis that investigates the combined effect of labour market institutions and openness on inflation across nineteen OECD economies, we show that inflation is negatively related to openness when wage bargaining is decentralized, while there is virtually no link between openness and inflation at higher levels of wage centralization.

Keywords: Inflation, Trade Openness, Wage Bargaining, Monetary Policy Games

JEL Classification: E5, F4, J5

Suggested Citation

Cavallari, Lilia and Cavallari, Lilia, Inflation and Openness with Non-Atomistic Wage-Setters (March 2000). Available at SSRN: https://ssrn.com/abstract=242736 or http://dx.doi.org/10.2139/ssrn.242736

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