Working Paper: CEPR ID: DP657
Authors: George Alogoskoufis; Ben Lockwood; Apostolis Philippopoulos
Abstract: We extend the `rational-partisan' model of inflation to allow for the effects of unemployment persistence on the dynamics of inflation. We combine this model with the `exchange-rate-regime' model of inflation and examine the experience of the United Kingdom. Outside the fixed exchange rate regime of Bretton Woods, persistently high inflation can be attributed to the failure of political parties to precommit to price stability, in the light of unemployment persistence. Elections are associated with higher inflation, with the exception of the Thatcher period. There is no evidence that the Labour party is more inflationary in general than the Conservatives.
Keywords: politics; elections; exchange rate regimes; inflation; unemployment; UK
JEL Codes: E31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| party ideology (socialist vs. conservative) (P35) | inflation rates (E31) |
| electoral cycles (K16) | inflation dynamics (E31) |
| exchange rate regime (F33) | expected inflation (E31) |
| unemployment rate (J64) | expected inflation (E31) |
| elections (K16) | inflation rates (E31) |
| exchange rate regime (F33) | nominal wage growth (J39) |