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




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.

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

Full Article in PDF.

Money and Endogenous Growth

This paper provides a coherent framework of endogenous growth and overlapping generations with money in the utility function and inelastic labor supply. Monetary growth permanently affects real growth. An increase in monetary growth then no longer leads to an identical increase in inflation,and also money is no longer the sole determinant of inflation in the long run. We also show that increases in public debt and public consumption damage growth prospects and thus increase inflation even when accompanied by increases in lump-sum taxes and a constant rate of growth of the nominal money supply.

Journal of Money, Credit and Banking (with Rick van der Ploeg)

Full Paper PDF

On Public Debt Stabilizations in an Interdependent World

This paper considers alternative modes of stabilization of world-wide and relative levels of public debt. The analysis is in terms of a model of overlapping, infinitely lived households. Three methods are compared: tax finance, public- consumption finance and monetary finance. We show that a tax-financed world-wide public-debt stabilization results in the highest reduction in consumption and the capital stock; monetary finance has no real effects in the model examined, other than on the composition of public-sector liabilities between money and bonds. A tax-financed relative public-debt stabilization by one country is shown to be associated with a greater rise in external debt and fall in relative consumption than either of the other methods. Monetary finance is again shown to have no real effects.

in George Alogoskoufis, Tryphon Kollintzas and George Provopoulos (eds), Essays in Honor of Constantine Drakatos, Athens, Papazissis. 

The ECU, the International Monetary System and the Management of Exchange Rates

This paper examines the prospective implications of full Economic and Monetary Union (EMU) in Europe for the international monetary system. It makes a giant leap forward in trying to compare the status quo, in which nine of the twelve EC currencies participate in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) with full monetary union in which all currencies will have been replaced by a single currency. It concentrates of two main issues: The prospective role of the ECU as an international vehicle and reserve currency, and the implications for the dollar. Second, it examines the prospective changes that EMU will imply for the international coordination of monetary and fiscal policies between the USA, the EC and Japan and the exchange rate regime between the dollar, the ECU and the yen.

in Bekemans Leonce and Tsoukalis Loukas (eds), Europe and Global Economic Interdependence, Bruges, European Interuniversity Press.