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

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.