Abstract
This paper reviews recent work on macroeconomic management with varying organization of wage/price bargaining and degrees of credible monetary conservatism. The emerging literature synthesizes and extends theory and empirics on central bank independence (CBI) and coordinated wage/price bargaining (CWB), arguing that the degrees of CBI and CWB interact with each other and with other political-economic conditions (sectoral composition, international exposure, etc.) to structure the incentives facing actors involved in monetary policy and wage/price bargaining. The core implication, theoretically surprising but empirically supported, is that even perfectly credible monetary conservatism has long-run, equilibrium, on-average real effects, even with fully rational expectations, and that these effects depend on the organization of wage/price bargaining. Conversely, wage/price-bargaining structure has real effects that depend on the degree of credible conservatism reflected in monetary-policy rules. Each also has interactive nominal effects though this is less surprising. Some disagreement remains over the precise nature of these interactive effects, but all emerging theory and evidence agree that a common, credibly conservative European monetary policy has nominal and real effects that depend on the Europe-wide institutional-structural organization of wage/price bargaining. Indeed, the one specific piece of theoretical and empirical agreement suggests that, for many member countries, the nominal gains from monetary-policy delegation to a credibly conservative European Central Bank will worsen these bargaining-policy interactions.
Similar content being viewed by others
References
Agell, J. and Ysander, B-C. (1993) ‘Should Governments Learn to Live with Inflation? Comment’, American Economic Review 83, 305–311.
Akerloff, G. and Yellen, J. (1985) ‘A Near-Rational Model of the Business Cycle with Wage and Price Inertia', Quarterly Journal of Economics 100, 823–838.
Alesina, A. and Summers, L. (1993) ‘Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence', Journal of Money, Credit, and Banking 25, 151–163.
Al-Marhubi, F. and Willett, T. (1995) ‘The Anti Inflationary Influence of Corporatist Structures and Central Bank Independence: The Importance of the Hump Shaped Hypothesis', Public Choice 84, 153–162.
Alogoskoufis, G.S. and Manning, A. (1988) ‘On the Persistence of Unemployment', Economic Policy 7, 427–469.
Bade, R. and Parkin, M. (1982) ‘Central Bank Laws and Monetary Policy', Typescript, Department of Economics, University of Western Ontario.
Ball, L. and Romer, D. (1990) ‘Real Rigidities and the Non-neutrality of Money', Review of Economic Studies 57, 183–203.
Barro, R. and Gordon, R. (1983a) ‘Rules, Discretion, and Reputation in a Model ofMonetary Policy', Journal of Monetary Economics 12, 101–122.
Barro, R. and Gordon, R. (1983b) ‘A Positive Theory of Monetary Policy in a Natural Rate Model', Journal of Political Economy 91, 589–610.
Berger, H., Hefeker, C., and Schoeb, R. (1999) ‘Optimal Central Bank Conservatism and Monopoly Trade Unions', Mimeo, University of Munich.
Blanchard, O.J. and Fisher, S. (1989). Lectures on Macroeconomics. MIT Press.
Bleaney, M. (1996) ‘Central Bank Independence, Wage-Bargaining Structure, and Macroeconomic Performance in OECD Countries', Oxford Economic Papers 48, 20–38.
Bruno, M. and Sachs, J. (1987) The Economics of Worldwide Stagflation. Cambridge: Harvard University Press.
Calmfors, L. (ed.) (1990) Wage Formation and Macroeconomic Policy in the Nordic Countries. Uppsala: SNS Forlag.
Calmfors, L. (1993) Centralization of Wage Bargaining and Macroeconomic Performance – A Survey, Seminar Paper No. 536. Stockholm: Institute for International Economic Studies.
Calmfors, L. (1998) ‘Macroeconomic Policy, Wage Setting, and Employment – What Difference Does the EMU Make?’ Oxford Review of Economic Policy 14, 125–151.
Calmfors, L. and Driffill, J. (1988) ‘Centralisation of Wage Bargaining and Macroeconomic Performance', Economic Policy 6, 13–61.
Cameron, D. (1984) ‘Social Democracy, Corporatism, Labor Quiescence, and the Representation of Economic Interest in Advanced Capitalist Society’, in J.H. Goldthorpe, ed., Order and Conflict in Contemporary Capitalism. New York: Oxford University Press.
Carlin, W. and Soskice, D. (1990) Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation and the Exchange Rate. Oxford: Oxford University Press.
Clark, W., Reichert, U.N. with Lomas, S.L., and Parker,. K.L. (1998) ‘International and Domestic Constraints on Political Business Cycles in OECD Economies', International Organization 52, 87–120.
Cubitt, R.P. (1989) Precommitment and the Macroeconomic Policy Game, D.Phil. Thesis, University of Oxford.
Cubitt, R.P. (1992) ‘Monetary Policy Games and Private Sector Precommitment', Oxford Economic Papers 44, 513–530.
Cubitt, R.P. (1995) ‘Corporatism, Monetary Policy and Macroeconomic Performance: A Simple Game Theoretic Analysis', Scandinavian Journal of Economics 97, 245–259.
Cukierman, A. (1992) Central Bank Strategy, Credibility, and Independence: Theory and Evidence, MIT Press, Cambridge.
Cukierman, A. (1996) ‘The Economics of Central Banking', Working Paper No. 36–96. Tel-Aviv: The Stackler Institute for Economic Studies, Tel-Aviv University.
Cukierman, A. and Lippi, F. (1999) ‘Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment: Theory and Some Evidence', European Economic Review 43, 1395–1434.
De Haan, J. (1999) ‘Endogenizing the Bias', Mimeo, University of Groningen.
Eijffinger, S.C.W. and De Haan, J. (1996) ‘The Political Economy of Central Bank Independence', Special Papers in International Economics #19. International Finance Section, Department of Economics, Princeton University.
Forteza, A. (1998) ‘TheWage Bargaining Structure and the Inflationary Bias', Journal of Macroeconomics 20, 599–614.
Franzese, R. (1994) ‘Central Bank Independence, Sectoral Interest, and the Wage Bargain', Harvard Center for European Studies Working Paper #56, Cambridge (reprinted: 5–1, 1995).
Franzese, R. (1996) The Political Economy of Over-Commitment: A Comparative Study of Democratic Management of the Keynesian Welfare State, Ph.D. Diss., Harvard University.
Franzese, R. (1999a) ‘Monetary Policy and Wage/Price Bargaining: Macro-Institutional Interactions in the Traded, Public, and Sheltered Sectors', Forthcoming in P. Hall and D. Soskice, eds., Varieties of Capitalism: The Institutional Foundations of Comparative Advantage.
Franzese, R. (1999b) ‘Partially Independent Central Banks, Politically Responsive Governments, and Inflation', American Journal of Political Science 43, 681–706.
Franzese, R. and Hall, P. (1999) ‘Institutional Dimensions of Coordinating Wage-Bargaining and Monetary Policy', in T. Iversen, J. Pontusson, and D. Soskice, eds., Unions, Employers, and Central Banks: Wage Bargaining and Macroeconomic Policy in an Integrating Europe. Cambridge University Press.
Garrett, G. and Way, C. (1995a) ‘Labor Market Institutions and the Economic Consequences of Central Bank Independence', Paper presented at the 1995 American Political Science Association Conference.
Garrett, G. and Way, C. (1995b) ‘The Rise of Public Sector Unions and the Decline of Corporatism', Paper presented at the 1995 Midwest Political Science Association Conference (Chicago).
Golden, M. (1993) ‘The Dynamics of Trade Unionism and National Economic Performance', American Political Science Review 87, 439–454
Golden, M. and Wallerstein, M. (1995) ‘Trade Union Organization and Industrial Relations in the Post-war Era in 16 Nations', Paper given at the 1995 Midwest PSA Conference (Chicago).
Grilli, V., Masciandaro, D., and Tabellini, G. (1991) ‘Political and Monetary Institutions and Public Financial Policies in the Industrial Countries', Economic Policy 13, 341–392.
Grüner, H.P. and Hefeker, C. (1999) ‘How Will EMU Affect Inflation and Unemployment in Europe?’ Scandinavian Journal of Economics 101, 33–47.
Gylfason, T. and Lindbeck, A. (1994) ‘The Interaction of Monetary Policy and Wages', Public Choice 79, 33–46.
Hall, P. (1994) ‘Central Bank Independence and Coordinated Wage Bargaining: Their Interaction in Germany and Europe', German Politics and Society, Autumn:1–23.
Hall, P. and Franzese, R. (1998) ‘Mixed Signals: Central Bank Independence, Coordinated Wagebargaining, and European Monetary Union', International Organization 52, 505–536.
Headey, B. (1970) ‘Trade Unions and National Wage Policies', Journal of Politics 32, 407–429.
Havrilesky, T. and Granato, J. (1993) ‘Determinants of Inflationary Performance: Corporatist Structures vs. Central Bank Independence', Public Choice 76, 249–261.
Hibbs, D. (1987) The American Political Economy. Cambridge: Harvard University Press.
Hirsch, F., Goldthorpe, J. (eds.) (1978) The Political Economy of Inflation. Cambridge: Harvard University Press.
Iversen, T. (1998a) ‘Wage Bargaining, Hard Money and Economic Performance: Theory and Evidence for Organized Market Economies', British Journal of Political Science 28, 31–62.
Iversen, T. (1998b) ‘Wage Bargaining, Central Bank Independence, and the Real Effects of Money', International Organization 52, 469–504.
Iversen, T. (1999) ‘The Political Economy of Inflation: Bargaining Structure or Central Bank Independence', Public Choice 99, 237–258.
Jensen, H. (1997) ‘Monetary Policy Coordination May Not Be Counterproductive', Scandinavian Journal of Economics 99, 73–80.
Jonsson, G. (1995) ‘Institutions and Macroeconomic Outcomes – The Empirical Evidence', Swedish Economic Policy Review 2, 181–212.
Kennedy, E. (1991) The Bundesbank: Germany's Central Bank in the International Monetary System. New York: Council on Foreign Relations Press.
Kydland, F.E. and Prescott, E.C. (1977) ‘Rules Rather than Discretion: The Inconsistency of Optimal Plans', Journal of Political Economy 85, 473–492.
Lange, P. (1984) ‘Unions, Workers, and Wage Regulation: The Rational Bases of Consent', in J.H. Goldthorpe, ed., Order and Conflict in Contemporary Capitalism. New York: Oxford University Press.
Lange, P. and Garrett, G. (1985) ‘The Politics of Growth', Journal of Politics 47, 792–827.
Lange, P., Wallerstein, M., and Golden, M. (1995) ‘The End of Corporatism? Wage Setting in the Nordic and Germanic Countries', in S. Jacoby, ed., Workers of Nations. Oxford University Press.
Layard, R., Nickell, S., and Jackman, R. (1991) Unemployment: Macroeconomic Performance and the Labour Market. New York: Oxford University Press.
Lehmbruch, G. and Schmitter, P. (eds.) (1982) Patterns of Corporatist Policy-Making. London: Sage.
Lohmann, S. (1992) ‘Optimal Commitment in Monetary Policy: Credibility Versus Flexibility', American Economic Review 82, 273–286.
Mankiw, N.G. (1985) ‘Small Menu Costs and Large Business Cycles: A Macroeconomic Model’, Quarterly Journal of Economics 10, 529–538.
Oatley, T. (1999) ‘How Constraining is Capital Mobility? The Partisan Hypothesis in an Open Economy', American Journal of Political Science 43, 1003–1027.
OECD (1997) ‘Economic Performance and the Structure of Wage Bargaining', in Employment Outlook, pp. 97–134.
Olson M. (1965) The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge: Harvard University Press.
Ozkan, F.G., Sibert, A., and Sutherland, A. (1998) ‘Monetary Union, Entry Conditions, and Economic Reform', Mimeo, University of Durham.
Persson, T. and Tabellini, G. (eds.) (1994) Monetary and Fiscal Policy, Volumes 1–2. Cambridge: MIT Press.
Posen, A. (1995a) ‘Central Bank Independence and Disinflationary Credibility: A Missing Link?’ Brookings Papers on Economic Activity #109.
Posen, A. (1995b) ‘Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence', NBER Macroeconomics Annual: 253–274.
Rama, M. (1994) ‘Bargaining Structure and Economic Performance in the Open Economy', European Economic Review 38, 403–415.
Regini, M. (1984) ‘The Conditions for Political Exchange: How Concertation Emerged and Collapsed in Italy and Great Britain', in J. Goldthorpe, ed., Order and Conflict in Contemporary Capitalism. New York: Oxford University Press, pp. 124–142.
Rogoff, K. (1985) ‘The Optimal Degree of Commitment to an Intermediate Monetary Target', Quarterly Journal of Economics 100, 1169–1190.
Scharpf, F. (1984) ‘Economic and Institutional Constraints of Full-Employment Strategies', in J.H. Goldthorpe, ed., Order and Conflict in Contemporary Capitalism. New York: Oxford University Press.
Scharpf, F. (1987) ‘Game-Theoretical Interpretations of Inflation and Unemployment in Western Europe', Journal of Public Policy 7, 227–257.
Scharpf, F. (1991) Crisis and Choice in European Social Democracy. Ithaca: Cornell University Press.
Sibert, A. (1999) ‘Monetary Integration and Economic Reform', The Economic Journal 109, 78–92.
Sibert, A. and Sutherland, A. (1998) ‘Monetary Regimes and Labor Market Reform', CEPR Discussion Paper 1731.
Simmons, B. ‘Rulers of the Game: Central Bank Independence During the Interwar Years', International Organization 50, 407–443.
Skott, P. (1997) ‘Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy’, Oxford Economic Papers 49, 609–622.
Soskice, D. (1990) ‘Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries', Oxford Review of Economic Policy 6, 36–61.
Soskice, D. and Iversen, T. (1998) ‘Multiple Wage-Bargaining Systems in the Single European Currency Area', Oxford Review of Economic Policy 14, 110–124.
Soskice, D. and Iversen, T. (1999) ‘The Non-Neutrality of Monetary Policy with Large Price orWage Setters', Unpublished Manuscript, Cambridge, MA: Harvard University.
Swenson, P. (1989) Fair Shares, Cornell University Press, Ithaca.
Thelen, K. (1994) ‘Beyond Corporatism: Toward a New Framework for the Study of Labor in Advanced Capitalism', Comparative Politics 27, 107–125.
Velasco, A. and Guzzo, V. (1999) ‘The Case for a Populist Central Banker', European Economic Review, forthcoming 43, 1317–1344.
Way, C. (2000) ‘Central Banks, Partisan Politics, and Macroeconomic Outcomes', Comparative Political Studies 33, 196–224.
Yashiv, E. (1989) ‘Inflation and the Role of Money Under Discretion and Rules', Working Paper No. 8–89, PSIE, MIT, November.
Zervoyianni, A. (1997) ‘Monetary Policy Games and Coalitions in a Two-Country Model with Unionised Wage-Setting’, Oxford Economic Papers 49, 57–76.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Franzese, R.J. Strategic Interactions of Monetary Policymakers and Wage/Price Bargainers: A Review with Implications for the European Common-Currency Area. Empirica 28, 457–486 (2001). https://doi.org/10.1023/A:1013970422212
Issue Date:
DOI: https://doi.org/10.1023/A:1013970422212