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

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.