Wage Inflation, Electoral Uncertainty and the Exchange Rate Regime: Theory and UK Evidence.

The authors extend the "rational partisan" model of inflation to allow for the effects of unemployment persistence on the dynamics of inflation. The authors 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. Election times are associated with higher inflation, with the exception of the Thatcher period. There is no evidence that the Labour party is in general more tolerant to inflation than the Conservatives. Copyright 1992 by Royal Economic Society.