STAGFLATIONARY CONSEQUENCES OF PRUDENT MONETARY POLICY IN A UNIONIZED ECONOMY |
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Authors: | SKOTT PETER |
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Institution: | Department of Economics, University of Aarhus 8000 Aarhus C, Denmark; email pskott{at}eco.aau.dk |
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Abstract: | Stylised models of the policy game between monetary policy makersand the private sector have suggested that discretionary policyregimes suffer from an inherent inflationary bias and that pre-commitmentto a target rate of inflation may be desirable. This paper showsthat in the presence of labour unions, the monetary policy gamecan lead to radically different results: a central bank thatis completely indifferent to the level of inflation may obtainoutcomes with high employment rates and zero inflation whileprudent, inflation-averse, central banks generatestagflation with positive inflation and low rates of employment. |
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