Strategic Interactions of the ECB, Wage Bargainers, and Governments

Abstract

Recent studies of macroeconomic management under varying organization of wage/price bargaining and varying degrees of credible monetary conservatism synthesize and extend theory and empirics on central bank independence (CBI) and coordinated wage/price bargaining (CWB). These studies find that the degrees of CBI and CWB interact with each other and with the broader political-economic context (international exposure, sectoral composition, etc.) to structure monetary-policymaker and wage/price-bargainer incentives. The theoretically surprising but empirically supported core implication was that even perfectly credible monetary conservatism has long-run, equilibrium, on-average real effects, even with fully rational expectations, effects that vary depending on the organizational structure of wage/price bargaining. Bargaining structure, conversely, has real effects that vary with the degree of credible conservatism reflected in monetary-policy rules, and, less surprisingly, CBI and CWB also have interactive nominal effects. Some disagreement remained over the precise nature of these interactive effects, but all theory and evidence agree that a single, credibly conservative European monetary policy would have nominal and real effects that depend upon the Europe-wide institutional-structural organization of wage/price bargaining relative to the prior domestic CBI-CWB combination. Indeed, the one specific point of theoretical and empirical agreement suggests that, for many Euro-member countries, monetary delegation to the single, credibly conservative, European Central Bank would generally worsen these bargainer-policymaker interactions. This review closes with a preliminary assessment of those predicted macroeconomic consequences one year after Euro notes and coins replaced twelve national currencies.1