Openness, Central Wage Bargaining, and Inflation

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Date
2005-08-13Author
Daniels, Joseph P.
Nourzad, Farrokh
VanHoose, David D.
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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 but then results in an inflation dropoff, (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 strong and robust
empirical support for all three of these predictions.