The Clash of Central Bankers with Labour Market Insiders, and the Persistence of Inflation and Unemployment

This paper analyses the implications of monetary policy for the dynamic behaviour of inflation, in a ‘natural’ rate model characterized by endogenous unemployment persistence. We present evidence for the main industrial economies which suggests that inflation displays persistence which is of the same order of magnitude as the persistence of deviations of unemployment from its ‘natural’ rate. We provide a theoretical explanation of this fact based on a model of the dynamic interactions between central bankers and labour market insiders. The clash in the objectives of central bankers and labour market insiders is what causes both inflation and unemployment to display the same degree of persistence in this model. The analysis suggests that inflation persistence could be addressed in a welfare-improving way, if central banks adopted monetary policy rules that targeted unanticipated changes in unemployment rates instead of deviations of unemployment from its ‘natural’ rate.

Economica, Early View, 15 May 2017

PDF of Accepted Manuscript

 

 

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Endogenous Growth and External Balance in a Small Open Economy

This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is assumed small in the sense of being a price taker in international goods and assets markets. It is shown that the endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment and is independent of the preferences of domestic households and budgetary policies. The preferences of consumers and budgetary policies determine the savings rate. The current account and external balance are functions of the difference between the savings and the investment rates. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Population growth, government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate.

Open Economies Review, (2014), 25, pp. 571-594DOI 10.1007/s11079-013-9290-8

PDF of Accepted Manuscript

Exchange Rate Regimes, Inflation and Credibility: Evidence from Greece

We investigate how exchange rate regimes affect the anti-inflationary credibility of monetary policy in Greece. The evidence suggests a positive impact of a fixed exchange rate regime to anti- inflationary credibility.

(with Philippopoulos A. and V. Vassilatos), in Korres, G.M. and Bitros, G.C. (eds.) Economic integration: Limits and prospects. Palgrave, Houndmills (2002).

This book is intended to provide a basic understanding of current issues and problems of economic integration. Identifying economic integration as one of the main features of modern international economics, the authors examine many aspects and consequences of economic integration which remain obscure and unexplored. After addressing general issues regarding with economic integration, the authors include empirical and theoretical analyses of the monetary union, social policy reform, social union, a public finance, and technological policies.

The Bank of Greece and Inflation: Independence and Democratic Accountability

This paper deals with the question of central bank independence and inflation control, with special reference to the Bank of Greece. After a brief discussion of the history of the Bank of Greece, it surveys current theories of inflation and the literature on the role of the anti-inflationary credibility of monetary policy. It then proceeds to define economic and political independence, with special reference to the problem of inflation and democratic accountability. It concludes that as a result of reforms in the early 1990s the Bank of Greece is already by and large economically independent. However, more needs to be done to make it politically independent as well. The paper suggests the directions of a political initiative to grant political independence to the Bank of Greece.

 

in Demopoulos G.D., Korliras P.G. and Prodromidis K.P. (eds), Essays in Economic Analysis (in Honor of Professor Theocharis), Athens, Sideris.

Exchange-Rate Regimes, Political Parties and the Inflation-Unemployment Tradeoff: Evidence from Greece

We use Greek data during 1960–1994 to test and estimate a model in which wage inflation, price inflation and unemployment depend on the exchange rate regime, the identity of the political party in power and whether an election is expected to take place. We respect the Lucas critique and take into account the statistical properties of the data. The main results are: (i) The exchange rate regime matters for inflation. After the fall of the Bretton Woods regime in 1972, there is a Barro-Gordon type inflation bias due to the inability of all policymakers to precommit to low inflation. (ii) There are no Barro-Gordon type partisan differences in inflation or unemployment.

Open Economies Review (with Dong-Ho Lee and Apostolis Philippopoulos)

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The Two Faces of Janus: Institutions, Policy Regimes and Macroeconomic Performance in Greece

The clear change in policy regime in Greece around 1974 offers an opportunity to assess the extent to which economic performance depends on institutional underpinnings. For twenty years up to 1974, Greece enjoyed rapid growth, high investment and low inflation; during the next twenty years, growth and investment collapsed and inflation became high and persistent.

I describe the political background to such clear institutional change, and the nature of the two economic regimes: the first providing coordination and commitment mechanisms to sustain adequate returns for high investment, the second failing to do so. The same change in political climate after 1974 raised public sector deficits and debt, fuelling a trade deficit and monetary expansion. Entry to the EC did not cause the economic slowdown in Greece, but transfers from the EC did mask the underlying problem, delaying necessary adjustment. Recent attempts to reverse Greece’s fortunes are in the right direction but as yet inadequate.

Economic Policy

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