Testing the impact of inflation targeting and central bank independence on labour market outcomes

We investigate the impact of inflation targeting and central bank independence on wage formation and unemployment using a panel of 20 OECD countries from 1982-2003. The results suggest that monetary institutions matter for wage formation. Real wages are on average higher under inflation targeting, in particular in economies with highly coordinated or centralized wage setting. This finding is in line with the strand of literature arguing that a liberal central bank may be more conducive to wage restraint than a conservative central bank if unions are inflation averse. Our results thus lend no support to the popular deterrence hypothesis. While inflation targeting seems to matter for wage formation, we find no evidence of effects on unemployment. Another key finding is that real wages tend to be lower in countries within the EMU. Copyright 2013 Oxford University Press 2012 All rights reserved, Oxford University Press.