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  • November 2004
  • Article
  • Review of Economics and Statistics

Unemployment Benefits As a Substitute for a Conservative Central Banker

By: Rafael Di Tella and Robert MacCulloch
  • Format:Print
  • | Pages:13
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Abstract

In the many years since their introduction, positive theories of inflation have rarely been tested. This paper documents a negative relationship between inflation and the welfare state (proxied by the parameters of the unemployment benefit program) that is to be expected in such theories. Because unemployment benefits make the monetary authority less concerned about the plight of the unemployed, building a welfare state has a similar effect to appointing a conservative central banker. The relationship holds in a panel of 20 OECD countries over the period 1961-1992, a region where Romer finds no evidence of commitment problems. It holds controlling for country and time fixed effects, country-specific time trends, other covariates, and using a decadal panel. Interpreted as causal, the estimated effect is economically large: a 1 standard deviation decrease in benefit duration is predicted to add 1.4 percentage points onto inflation, or 31% of the standard deviation in inflation.

Keywords

Unemployment; Welfare State; Compensation and Benefits; Inflation and Deflation

Citation

Di Tella, Rafael, and Robert MacCulloch. "Unemployment Benefits As a Substitute for a Conservative Central Banker." Review of Economics and Statistics 86, no. 4 (November 2004): 911–23.
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About The Author

Rafael M. Di Tella

Business, Government and the International Economy
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  • Causal Inference During A Pandemic: Evidence on the Effectiveness of Nebulized Ibuprofen as an Unproven Treatment for COVID-19 in Argentina By: Sebastian Calonico, Rafael Di Tella and Juan Cruz Lopez Del Valle
  • Does Social Media Cause Polarization? Evidence from Access to Twitter Echo Chambers during the 2019 Argentine Presidential Debate By: Rafael Di Tella, Ramiro H. Gálvez and Ernesto Schargrodsky
  • The 2012 Spanish Labor Reform: Lifting All Boats, or Leveling Down? By: Vincent Pons, Rafael Di Tella, Santiago Botella and Elena Corsi
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