Table Of ContentINSTITUTIONAL CONFLICTS AND COMPLEMENTARITIES
Institutional Conflicts and
Complementarities
Monetary Policy and Wage Bargaining Institutions in EMU
Edited by
Robert Franzese
University (jf Michigan, U.SA
Peter Mooslechner
Osterreichische Nationalbank, Vienna, Austria
and
Martin Schiirz
Osterreichische Nationalbank, Vienna, Austria
Springer Science+Business Media, LLC
A C.l.P. Catalogue record for this book is available from the Library of Congress
ISBN 978-1-4419-5380-3 ISBN 978-1-4757-4062-2 (eBook)
DOI 10.1007/978-1-4757-4062-2
Printed on acid-free paper
All Rights Reserved
© 2004 Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers, Boston in 2001
Softcover reprint of the hardcover 1s t edition 2004
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Table of Contents
l. Editorial 1-4
2. Strategic Interactions of the ECB, Wage Bargainers, and
Governments - Robert f. Franzese, fr. 5-42
3. Varieties of Capitalism and Institutional Complementarities
- Peter A. Hall and David Soskice 43-76
4. Wage and Wage-Bargaining Institutions in EMU: A Survey of
the Issues - Lars Calm/ors 77-105
5. Multiple Wage Bargaining Systems in the Single European
Currency Area - David Soskice and Torben Iversen 107-129
6. Strategic Wage Setting in a Monetary Union - Lila Cavillari 131-145
7. Interest Groups, Enlargement of the EMU and Labor Market
Reform - Michael Neugart 147-164
8. Does Price Stability Exacerbate Labor Market Rigidities in EMU
- Steinar Holden 165-181
9. Communication, Coordination and Common Knowledge in
Monetary Policy: Implications for the Euro Area
- David Stasavage 183-203
10. The European Central Bank: Implications of the Appointment
Process for Monetary Policy - Kelly H. Chang 205-230
11. Who's is Afraid of the Big Bad Central Bank? Union-Firm
Central Bank Interactions and Inflation in a Monetary Union
- Fabrizio Carmignani, Anton Muscatelli and Patrizio Tirelli 231-253
12. Institutional Complementarities and Conflicts between Wage
Bargaining Institutions and an Independent Central Bank
- Peter Mooslechner. Martin Schurz 255-269
Index 271-278
v
Editorial
Institutional Conflicts and Complementarities. Monetary
Policy and Wage Bargaining Institutions in EMU
Unlike just over a decade ago, most economists today agree that institutions
matter for the performance of the economy. Institutions in a very broad sense
comprise organizations, laws, social norms and habits. In more pragmatic terms,
the definition of institution will depend on the purpose of analysis. The com
parative political economy approach of the Varieties of Capitalism literature
understands institutions as the organizations, laws, social norms and habits
that coordinate the behaviour of political-economic actors.
The contributions to this volume identify linkages between wage bargaining
institutions and central banks with a particular focus on European Monetary
Union (EMU). The authors do not expect well-defined causal or unidirectional
relationships between these institutions but rather focus on the strategic inter
actions of these institutional actors. They revise the logic of institutional
complementarities between these different policy domains and study the impact
of these complementarities on economic performance. Their analyses show the
power of game theoretic tools for analyzing institutional interactions.
The concept of institutional complementarities derives from the Varieties of
Capitalism approach. Two institutions are complementary if the presence of
one increases the returns from the other (Hall/Soskice in this volume). An
important caveat to this understanding is that the institutional complementarities
of the past do not have to be the ones of the future. In bringing together wage
bargaining and EMU, we consider complementarities between institutions located
in different areas of the political economy and ask: Can labour-market actors
and independent central banks interact in mutually reinforcing ways?
The analyses in this book study centrally and critically a crucial assump
tion of the institutional design of European Monetary Union. Following a core
conclusion of much previous economic theory that credibly conservative
monetary policy could reduce inflation without equilibrium real effects, the
independence of the European Central Bank (ECB) was seen to offer a kind
of anti-inflationary free lunch. We reconsider this neutrality assumption under
the conditions of institutional interactions in EMU.
The first section of the book focuses on wage-setting behaviour in EMU.
In neocorporatism, attention centres on trade unions and their ability to inter
nalize the economic effects of their wage settlements. Lars Calmfors considers
the need to increase nominal wage flexibility as a substitute for domestic
1
R. Franzese et al. (eds.). Institutional Conflicts and Complementarities, 1-4,2003.
© 2003 Kluwer Academic Publishers.
2 EDITORIAL
monetary policy and notes tendencies toward less real-wage moderation in EMU.
He argues that these trends are likely to promote informal bargaining coordi
nation and social pacts in the medium run. However, such coordination is
unlikely to be sustainable in the long run, as it conflicts with other forces pushing
toward decentralization and deunionization. These conflicting pressures suggest
an intensified need for governmental intervention in wage setting during a
transitional period. Monetary unification will strengthen the incentives for
transnational coordination of wage bargaining, but such developments are
improbable given the coordination costs involved. If transnational coordina
tion does develop, it is most likely to occur within multinational firms.
This book is intent on building bridges between economics and the other social
sciences. Accordingly, the articles take an actor-centred approach where the
actors follow their interests in a rational way and interact strategically with
each other. In one such analysis, David Stasavage shows that coordination of
wage bargaining and transparency of central bank policymaking are two
alternative institutions that can enhance the speed with which the public
adjusts expectations in response to modifications of monetary policy. Both
mechanisms create common knowledge. Because EMU lacks coordinated wage
bargaining, Stasavage concludes that the ECB must be transparent in its
operations.
Given institutional conflicts, a question emerges regarding in which policy
domain institutions may adapt. For Lilia Cavallari, the wage bargaining process
should become coordinated in EMU. In a micro-founded model of a two-region
monetary union, she analyzes the macroeconomic impact of institutional reforms
in labour markets and central banking that may occur as a result of monetary
unification. The paper concludes that international wage coordination at the
EU level reduces EU-wide inflation with no costs for real activity. However,
higher wage coordination only in some Member States will affect macro
economic performance in an ambiguous way
Surveying the recent work on macroeconomic management with varying
organization of wage/price bargaining and degrees of credible monetary con
servatism, Robert Franzese also identifies dangers of institutional conflicts in
EMU. A credibly conservative European monetary policy has real effects that
depend on Europe-wide institutional structures. Offering an early empirical
evaluation of the macroeconomic consequences of EMU, he finds that the
terms of strategic interactions in monetary policymaking and wage/price bar
gaining have worsened for some euro area countries. As wage bargaining
structures differ, some countries will benefit more or suffer less from the
institutional mix implied by EMU than others.
Kelly Chang analyzes a formal model of the appointment process of monetary
policymakers in EMU. She concludes that the institutional structure of the
appointment process ensures a relatively tight monetary policy. This is the
starting point for Steinar Holden. How will such strong commitment to price
EDITORIAL 3
stability affect labour market characteristics in EMU? In his model, firms may
choose between fixed-wage contracts (where the employer cannot layoff the
worker, and the wage can only be changed by mutual consent) and contracts
where employment is at will, so that either party may terminate employment.
He shows that a fixed-wage contract provides better incentives for investment
and training, while employment at will facilitates efficient mobility. Inflation
erodes the real value of a fixed contract-wage over time, and badly matched
workers are more likely to quit for other jobs. Disinflation has opposing effects
on labour market rigidity, as fixed-wage contracts become more binding in
real terms, but fewer firms will choose fixed-wage contracts.
Fabrizio Carmignani, Anton Muscatelli, and Patrizio Tirelli show that a
conservative central bank may lead to aggressive wage claims. Restrictive
monetary policy that is not responsive to the output cycle may induce adverse
structural changes in the labour market. If policymakers integrate a negative
response to wage claims in their monetary policy rule, however, this effect
disappears. Thus, they suggest that the central bank target wage inflation, not
consumer price inflation.
Torben Iversen's paper focuses directly on this interaction between central
bank monetary rules and systems of collective wage bargaining. He argues
that the replacement of the German Bundesbank, which directly targeted domestic
inflation, by the ECB, which targets European inflation, has removed a major
institutional support of wage restraint in Germany. He studies the consequences
for EMU under two scenarios: where ECB monetary policy generates
inflation expectations and where German inflation outcomes induce them.
Michael Neugart expands on the concept of institutional incentives, starting
from the consideration that labour unions are not only wage setters but also
lobbyists. Their lobbying effects will decrease the incentives for governments
to reform national labor markets. Neugart's conclusion partly contradicts that
of Fabrizio Carmignani, Anton Muscatelli and Patrizio Tirelli. In their model,
either a very conservative or an ultraliberal central banker is welfare improving.
Peter Mooslechner and Martin Schurz analyze the literature on strategic
interactions and propose several avenues for future research. The consensus
that institutions matter does not imply any clear agreement about what consti
tutes an adequate concept of institutions. The authors consider recent
contributions on wage bargaining institutions and central banks in economics
and political science from this conceptual view, identifying the main differ
ences between sociological individualism and rational-choice individualism as
pointing toward new topics for research.
An important theoretical, empirical, and policy-relevant conclusion that
emerges from our book is, as stressed repeatedly in Franzese's review, that
even perfectly credible monetary conservatism has long-run real effects, even
in equilibrium models with fully rational expectations. These real effects of
monetary policy depend on the organization of wage/price bargaining and of
4 EDITORIAL
the broader political economy in complex ways, with multifarious comple
mentarities and conflicts possible. That games like these with multiple actors
and multiple iterations can have multiple equilibria depending on the specifics
of their strategic interactions is well known. Unlike game theoreticians, however,
policy analysts need not consider that a disadvantage or troublesome. On the
contrary, from a policy viewpoint this multiplicity of possible equilibria repre
sents a rather important result, showing that the interaction of diverse institutional
arrangements can yield a variety of strengths and weaknesses under conditions
of European Monetary Union.
More ontologically, we contend that, as institutions are "humanly devised"
(North 1990), political economists must continue their search for historical,
political, social, and other human factors that determine their context-depen
dent effects. This book with its emphasis on the interactions of major institutions
in EMU directs scholarly attention in that search to the intersection between
political science and economics.
Rob Franzese
Peter Mooslechner
Martin Schuerz
References
North, C.D. (1990) Institutions, Institutional Change, and Economic Performance. Cambridge
University Press.
Strategic Interactions of the ECB, Wage Bargainers,
and Governments
A Review of Theory, Evidence, and Recent Experience
ROBERT J. FRANZESE, JR.
University of Michigan, Ann Arbor, USA
Abstract. Recent studies of macroeconomic management under varying organization of wage/price
bargaining and varying degrees of credible monetary conservatism synthesize and extend theory
and empirics on central bank independence (CBI) and coordinated wage/price bargaining (CWB).
These studies find that the degrees of CBI and CWB interact with each other and with the broader
political-economic context (international exposure, sectoral composition. etc.) to structure
monetary-policymaker and wage/price-bargainer incentives. The theoretically surprising but
empirically supported core implication was that even perfectly credible monetary conservatism
has long-run. equilibrium, on-average real effects, even with fully rational expectations, effects
that vary depending on the organizational structure of wage/price bargaining. Bargaining struc
ture, conversely, has real effects that vary with the degree of credible conservatism reflected in
monetary-policy rules, and, less surprisingly, CBI and CWB also have interactive nominal effects.
Some disagreement remained over the precise nature of these interactive effects. but all theory
and evidence agree that a single, credibly conservative European monetary policy would have
nominal and real effects that depend upon the Europe-wide institutional-structural organization
of wage/price bargaining relative to the prior domestic CBI-CWB combination. Indeed. the one
specific point of theoretical and empirical agreement suggests that, for many Euro-member
countries. monetary delegation to the single. credibly conservative. European Central Bank
would generally worsen these bargainer-policymaker interactions. This review closes with a
preliminary assessment of those predicted macroeconomic consequences one year after Euro notes
and coins replaced twelve national currencies. I
Key words: monetary policy. wage bargaining, central bank independence, Euro, European central
bank. ECB
1. Introduction
Until recently, political economists considering the implications of the Euro
countries' monetary-policy delegation to one, credibly conservative, European
central bank confronted two disparate literatures on the institutional-structural
determinants of inflation and employment. One, deriving from modern game
theoretic approaches to macroeconomic policy, stressed monetary authorities'
anti-inflationary rigor and autonomy from governments, arguing that credibly
5
R. Fran::.ese et al. (eds.), Institutional Conflicts and Complementarities. 5-42. 2003.
© 2003 Kluwer Academic Publishers.
6 ROBERT J. FRANZESE, JR.
independent and conservative central banks (CBl) offered nominal benefits at
no equilibrium, long-run, real costs on average.2 The other, arising from studies
of democratic interest intermediation, stressed institutional organization in labor
and, recently, goods markets, arguing that coordinated wage/price-bargaining
(CWB) internalizes certain externalities inherent in wage/price settlements, thus
facilitating restraint and thereby providing real and perhaps nominal benefits.3
From CBI arguments and evidence, academics and policymakers concluded
that the credible conservatism (CC) embodied in the European Central Bank
(ECB) would ensure low inflation of the common Euro currency at little or no
real cost. Insights from CWB theory seemed only tangentially relevant. Degrees
of bargaining coordination (BC) in the Euro area might affect real outcomes,
possibly thereby altering the nominal benefits of the ECB; otherwise, standard
CBI and CWB theories, developed independently, suggested that their effects
would remain independent. This exclusive focus on the degrees of BC or of
C~ institutionalized in the political economy aided theoretical development
of both literatures, each of which became in its time among the most practi
cally and academically influential in political economy. However, wage/price
bargaining and monetary policymaking being such intimately related exercises,
these two sets of policymakers and bargainers would surely interact strategically
if their institutional structures provide them the organizational capacity to do
so.
This chapter reviews recent work addressing such strategic interactions of
wage/price bargainers and monetary policymakers under varying degrees of
BC and of Cc. Building from early CBI and CWB theories and empirics, the
newer models stress that degrees of CC and BC interact, with each other and
the wider political-economic context (sectoral composition, international
exposure, etc.), to structure the incentives facing political-economic actors. These
interactions imply that even fully credible monetary conservatism has equilib
rium, long-run, on-average real effects that depend on bargaining organization,
rational expectations notwithstanding. Conversely, Be's real effects depend on
degrees of CC. Less surprisingly, nominal effects are also interactive. Intuitively:
the efficacy of monetary-policy signals depends on characteristics of the sender,
e.g., monetary-authority credibility and conservatism as previously emphasized,
but also on those of the audience that must receive and react to those signals,
e.g., wage/price-bargaining structure. For example, pre-Euro monetary efficacy
in Germany hinged on interactions of German bargaining organizations with
Bundesbank monetary policy. Monetary efficacy in a single-currency Europe
now depends, analogously, on interactions of ECB monetary policymaking
s
with European wage/price-bargaining organization. Thus, even if the ECB con
servatism and autonomy from European governments equaled what the
Bundesbank had had, the ECB's monetary-policy stance will affect the European
economy differently than similar Bundesbank stances had affected the German
economy because their wage/price-bargaining and governmental audiences differ.
