Monetary Integration, Partisanship, and Macroeconomic Policy

Most of the current literature on macroeconomic policies focus on cyclical phenomena such as politically induced business cycles, and how short-sighted policies can be overcome through proper institutional design. This paper instead focuses on the lasting effects of macroeconomic policies on such “real” economic variables as unemployment and distribution, and we argue that traditional distributive politics is important for understanding the choice over policies and institutions. We derive our hypotheses from a rational expectations model of the choice over macroeconomic policies, wage bargaining institutions, and union wage strategies, and we present evidence from Europe that corroborates these hypotheses. The model helps us understand not only cross-national differences in macroeconomic policies, institutions and performance, but also the effects on these variables of international monetary integration.