Central Bank: Conclusion

In both cases inflation is hump-shaped in the degree of CBC. And in both cases the effect (whether positive or negative) of a marginal change the number of unions on inflation seems to be largest at intermediate levels of central bank independence.This result fits well with our earlier observation that, in the limits as p —> 0 and p —> oo, inflation goes to zero independently of the number of unions.

The only difference between the two cases is that inflation is monotonically increasing in the number of n of unions if substitutability among labor types is limited (cr is low), and U-shaped if substitutability among labor types is substantial (rr is high). This means that the effect (whether positive or negative) of central bank independence on inflation seems to be largest at either very high or very low n if a is high, and at high n if a is low.


According to the traditional view in the literature, a high degree of central bank conservatism reduces average inflation rates, with little or no cost to the performance of the real economy. In this paper we argue that these links cannot be analyzed independently from the degree of labor corporatism -and that one on does, some of the conventional wisdom is overturned.

We build up a general equilibrium model, fully developed from microfunda-tions, that investigates in a systematic way the interactions among central bank conservatism, centralization of wage setting and economic performance.

The model yields several striking results. For a given level of CWS, high CBC can be costly in terms of employment and output (this effect is particularly strong if the labor market is highly centralized). Furthermore, inflation is not monotonic in the degree of CBC, but follows an hump shape. Taken together, these two results imply that a moderately conservative central banker achieves the lowest possible welfare level. On the other hand, a populist central banker maximizes welfare by providing zero inflation and the optimal level of employment.

Conventional wisdom on the effects of labor market centralization also turns out to be misleading. We show that, depending on parameter values, economic performance may be monotonic ally decreasing or hump-shaped in the number of unions. More generally, the model suggests that the relationship between labor market centralization, on the one hand, and variables such as employment, output and inflation, on the other, are likely to be dependent on model specifics. In particular, the specification of technology, and the implied relationship between the elasticity of labor demand and the number of unions is likely to be key. Further research using other specifications of how labor enters the production function, and what determines substitutability among labor types, should shed light on these issues. consolidate payday loans

The Firm’s Problem
Firm’s Cost Minimization
where Wt is defined in 2.4 in the text. Using the definition of Lt in 2.5 also in the text, and combining it with A.l and A.2, we obtain the demand function 2.3 in the text.

Firm’s Profit Maximization

The representative firm is competitive, so that it takes the aggregate wage Wt as given. The firm sets the level of output Yt by maximizing per-period profits 2.2 subject to the cost function A.2. The solution is the supply function 2.6 in the text.