The political economy of inflation: Bargaining structure or central bank independence?

The causes of inflation are commonly analyzed as the function of either the organization of wage bargaining or the independence of the central bank. A lthough these explanations are widely treated as competing, recent evidence suggests that there may be merit to both arguments. This paper presents a game-theoretic model of wage bargaining and monetary policy-making that sho ws why the two institutional causes are not only complementary, but element s of a more encompassing logic. The empirical superiority of this synthesiz ing model is demonstrated by reanalyzing data used in Al-Marhubi and Willet t (1995) and by presenting new evidence.