Credibly Conservative Monetary Policy and Wage/Price-Bargaining Organization: A Review with Implications for Monetary Policy in the European Common Currency Area

This paper reviews recent work on macroeconomic management with varying wage/pricebargaining organizational structures and degrees of credible commitment to 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 (e.g., 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. Although, much disagreement remains over the precise nature of these interactive effects, all emerging theory and evidence agree that a common, credibly conservative European monetary policy will have nominal and real effects that depend on the Europe-wide institutional-structural organization of wage/price bargaining. Indeed, the one piece of specific 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 have high real costs in terms of worsening these bargaining-policy interactions.