Robert J. Franzese, Jr
Until recently, political economists interested in institutional determinants of inflation and employment confronted two disparate and somewhat contradictory literatures. One, deriving from modern game-theoretic approaches to economic policy, stresses monetary authorities’ degrees of anti-inflationary conservatism and autonomy from governments. It is argued here that an independent and conservative central bank (CBI) can achieve nominal benefits at no long-term real costs. 1 The other, arising from studies of intermediation of different interests in democracies, stresses institutional organisation in labour and goods markets. It is argued here that co-ordinated wage-price bargaining (CWB) internalises externalities inherent in wage-price settlements, thus facilitating restraint and thereby providing real and perhaps nominal benefits. 2
Based on CBI arguments and associated evidence, most academics and policy-makers have concluded that the credible conservatism (CC) embodied in the ECB would produce low inflation of the common European currency at little or no real cost. The CWB insights seemed only tangentially relevant to this conclusion. Degrees of bargaining co-ordination (BC) in the currency area might affect real outcomes, possibly thereby altering the nominal benefits of the ECB. The CBI and CWB theories, developed independently, suggested that their effects would be independent. This exclusive focus on only one institutional feature of the political economy, be it the degree of central bank conservatism and autonomy from political authority or wageprice bargaining co-ordination, 3 no doubt aided theoretical development in each literature. However, monetary policy and wage-price bargaining are intimately related exercises, so policy-makers and bargainers will likely interact strategically if their institutional structure provides the capacity to do so.
This chapter reviews an emerging literature that addresses such strategic interaction of monetary policy-makers and wage-price bargainers under varying degrees of BC reflected in labour and goods markets and varying degrees of CC reflected in monetary institutions. Building from standard