The Welfare State as a Substitute for a Conservative Central Banker

Harvard Business School Working Paper No. 00-094

32 Pages Posted: 16 Sep 2003

See all articles by Robert MacCulloch

Robert MacCulloch

Imperial College London - Tanaka Business School

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit; National Bureau of Economic Research (NBER)

Date Written: February 2001

Abstract

Many years since their introduction, positive theories of inflation have rarely been tested. This paper documents a negative relationship between inflation and the welfare state (proxied by the parameters of the unemployment benefit program) that is to be expected in such theories. Because unemployment benefits make the monetary authority less concerned about the plight of the unemployed, building a welfare state has a similar effect to appointing a conservative central banker. The relationship holds in a panel of 21 OECD countries over the period 1961-92, a region where Romer (1993) finds no evidence of commitment problems. It also holds controlling for country and time fixed effects, country specific time trends, other co-variates and a lagged dependent variable. The effects are economically large: a one standard deviation decrease in benefits is predicted to add 2.7 percentage points to inflation, or 52 percent of the standard deviation in inflation. We also allow for unemployment benefits to be endogenously determined.

Keywords: Inflation, unemployment benefits, endogenous welfare state

JEL Classification: E52, E62, F41

Suggested Citation

MacCulloch, Robert and Di Tella, Rafael, The Welfare State as a Substitute for a Conservative Central Banker (February 2001). Harvard Business School Working Paper No. 00-094. Available at SSRN: https://ssrn.com/abstract=436301 or http://dx.doi.org/10.2139/ssrn.436301

Robert MacCulloch (Contact Author)

Imperial College London - Tanaka Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit ( email )

Cambridge, MA
United States
617-495-5048 (Phone)
617-496-5985 (Fax)

HOME PAGE: http://www.people.hbs.edu/rditella/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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