The Clash of Central Bankers with Labour Market Insiders, and the Persistence of Inflation and Unemployment

25 Pages Posted: 7 Dec 2017

See all articles by George S. Alogoskoufis

George S. Alogoskoufis

Athens University of Economics and Business

Date Written: January 2018

Abstract

This paper analyses the implications of monetary policy for the dynamic behaviour of inflation, in a ‘natural’ rate model characterized by endogenous unemployment persistence. We present evidence for the main industrial economies that suggests that inflation displays persistence which is of the same order of magnitude as the persistence of deviations of unemployment from its ‘natural’ rate. We provide a theoretical explanation of this fact based on a model of the dynamic interactions between central bankers and labour market insiders. The clash in the objectives of central bankers and labour market insiders is what causes both inflation and unemployment to display the same persistence in this model. The analysis suggests that inflation persistence could be addressed in a welfare‐improving way, if central banks adopted monetary policy rules that targeted unanticipated changes in unemployment rates instead of deviations of unemployment from its ‘natural’ rate.

Suggested Citation

Alogoskoufis, George S., The Clash of Central Bankers with Labour Market Insiders, and the Persistence of Inflation and Unemployment (January 2018). Economica, Vol. 85, Issue 337, pp. 152-176, 2018. Available at SSRN: https://ssrn.com/abstract=3083171 or http://dx.doi.org/10.1111/ecca.12241

George S. Alogoskoufis (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
GR-10434 Athens
Greece
00 30 1 361 6259 (Phone)
00 30 1 362 4689 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
38
PlumX Metrics