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Andres Velasco, Vincenzo Guzzo
NBER Working Paper No. 6802*
Issued in November 1998
NBER Program(s): IFM
---- Abstract -----
We present a general equilibrium optimizing model in which we study the joint effects of centralization of wage setting and central bank conservatism on economic performance. Several striking conclusions emerge. In relatively centralized labor markets employment and output are decreasing and inflation is initially increasing and then decreasing in the degree of central bank conservatism. A radical-populist central banker who cares not at all about inflation (alternatively, who is not conservative) maximizes social welfare. Economic performance is not U-shaped in the degree of centralization of the labor market, in contrast to conventional wisdom.
*Published: Published as "The Case for a Populist Central Banker", European Economic Review, Vol. 43, no. 7 (June 1999): 1317-1344.
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