Document Type




Format of Original

20 p.

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Source Publication

European Journal of Political Economy

Source ISSN



This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase at low degrees of wage centralization but then, as wage centralization increases, results in an inflation drop-off; (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence; and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970–1999 provides generally robust empirical support for all three of these predictions.


Accepted version. Originally published in European Journal of Political Economy, Volume 22, No. 4 (December 2006), DOI: 10.1016/j.ejpoleco.2005.09.001. Published under Creative Commons license Attribution-NonCommercial-NoDerivatives 4.0 International.

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