WAGE INFLATION, ELECTORAL UNCERTAINTY AND THE EXCHANGE-RATE REGIME - THEORY AND UK EVIDENCE

The present paper attempts two things. First, it generalises the partisan model to allow for unemployment persistence. This extension is non-trivial because if unemployment persists, any reduction in unemployment will have future as well as current benefits for the party in power. Second, we investigate empirically the applicability of this "extended' partisan model, and the related fixed-exchange-rate-regime model, to the post-war experience of the UK. The UK is particularly suitable for such an investigation as it is perceived to have had a rather polarised political system in the post-war period. The way we analyse these issues is to assume that wage setters set nominal wages for one period (in our case a year) in advance, in order to achieve an employment target. Because of the dependence of the wage setters' target on last period's unemployed, changes in unemployment persist, and the unemployment rate only gradually returns to its equilibrium rate. -from Authors