Credibly Conservative Monetary Policy and Labor-/Goods-Market Organization: A Review with Implications for ECB-Led Monetary Policy in Europe

Abstract: This chapter reviews recent work on political-economic management of monetary policy under varying institutional organization of labor/goods markets and varying degrees of credible conservatism in monetary policy. The emerging literature synthesizes and extends theoretical and empirical insights of previous work on central bank independence (CBI) and coordinated wage/price bargaining (CWB), emphasizing that degrees of CBI and CWB interact, with each other and with other political-economic considerations (e.g., sectoral composition, international exposure, etc.), to structure the incentives facing political-economic actors involved in monetary policy and wage/price bargaining. The core implication, theoretically surprising but empirically supported, is that even perfectly credible commitment to monetary conservatism has long-run, onaverage real effects, even given fully rational expectations, and that these effects depend on labor/goods-market institutional structure. The real effects of labor/goods-market organization, conversely, depend on the degree of credible conservatism reflected in monetary-policy rules. Nominal effects are also interactive though this is less surprising. Thus, common European monetary policy led by a credibly conservative ECB will have nominal and real effects that depend, inter alia, on the Europe-wide institutional-structural organization of labor/goods markets. Indeed, recent arguments and evidence suggest that ECB could be less unambiguously beneficial than previously believed.