Working Paper: CEPR ID: DP547
Authors: George S. Alogoskoufis; Apostolis Philippopoulos
Abstract: We extend the `rational partisan model' of inflation and unemployment by introducing inflation and unemployment dynamics. We investigate the case of Greece, which has had a polarized political system and a problem of persistently high inflation in the last two decades. High inflation can be attributed to the failure of political parties to precommit to price stability. The greater aversion of `socialists' to unemployment results in an inflation rate which is higher by five percentage points than under the more anti-inflationary `conservatives'. Unemployment seems to be independent of the identity of the party in power, and post-election years do not seem to be characterized by systematic mistakes on the part of wage setters as predicted by recent partisan theories.
Keywords: political parties; elections; inflation; unemployment; Greece
JEL Codes: 023; 025
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| identity of the party in power (D72) | expected price inflation (E31) |
| identity of the party in power (D72) | nominal wage growth (J39) |
| unemployment rates (J64) | identity of the party in power (D72) |
| anticipated inflation (E31) | unemployment (J64) |