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Mixed signals: central bank independence, coordinated wage bargaining, and European Monetary Union

  • Hall, Peter A.
  • Franzese, Robert J.
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    Plans for European Monetary Union are based on the conventional postulate that increasing the independence of the central bank can reduce inflation without any real economic effects. However, the theoretical and empirical bases for this claim rest onmodels of the economy that make unrealistic information assumptions and omitinstitutional variables other than the central bank. When the signaling problems between the central bank and other actors in the political economy are considered,we find that the character of wage bargaining conditions the impact of central bankindependence by rendering the signals between the bank and the bargainers moreor less effective. Greater independence can reduce inflation without majoremployment effects where bargaining is coordinated, but it brings higher levels ofunemployment where bargaining is uncoordinated. Thus, currency unions like the EMU may require higher levels of unemployment to control inflation than their proponents envisage; they will have costs as well as benefits, costs which will bedistributed unevenly among and within the member nations based on the changesinduced in the status of the bank and of wage coordination

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    Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Unit: Economic Change and Employment with number FS I 97-307.

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    Date of creation: 1997
    Date of revision:
    Handle: RePEc:zbw:wzbece:fsi97307
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    1. Kenen,Peter B., 1995. "Economic and Monetary Union in Europe," Cambridge Books, Cambridge University Press, number 9780521558839.
    2. Adam S. Posen, 1995. "Central bank independence and disinflationary credibility: a missing link?," Staff Reports 1, Federal Reserve Bank of New York.
    3. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 10, December.
    4. Alex Cukierman, 1993. "Central Bank Independence, Political Influence and Macroeconomic Performance: a Survey of Recent Development," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(91), pages 271-292.
    5. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
    6. Beck, Nathaniel & Katz, Jonathan N. & Alvarez, Michael R. & Garrett, Geoffrey & Lange, Peter, 1993. "Government Partisanship, Labor Organization and Macroeconomic Performance: A Corrigendum," Working Papers 848, California Institute of Technology, Division of the Humanities and Social Sciences.
    7. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    8. Havrilesky, Thomas & Granato, James, 1993. " Determinants of Inflationary Performance: Corporatist Structures vs. Central Bank Autonomy," Public Choice, Springer, vol. 76(3), pages 249-61, July.
    9. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
    10. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
    11. Soskice, David, 1990. "Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 36-61, Winter.
    12. Bleaney, Michael, 1996. "Central Bank Independence, Wage-Bargaining Structure, and Macroeconomic Performance in OECD Countries," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 20-38, January.
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    15. Locke, Richard M., 1959- & Jacoby, Wade., 1995. "The dilemmas of diffusion : institutional transfer and the remaking of vocational training practices in Eastern Germany," Working papers 3846-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    19. repec:tpr:qjecon:v:100:y:1985:i:4:p:1169-89 is not listed on IDEAS
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