The Interaction of Credibly Conservative Monetary Policy with Labor- and Goods-Market Institutions: A Review of an Emerging Literature

This chapter considers a recent literature on the political-economic management of monetary policy under various institutional-structural configurations of labor and goods markets and varying degrees of credibly conservative monetary-policy. It reviews the theoretical and empirical literatures on central bank independence (CBI), coordinated wage/price bargaining (CWB), and focuses on the emerging syntheses and extensions. These last emphasize that degrees of CBI and CWB interact, with each other and with other aspects of the political-economy, e.g. its sectorial composition or its international exposure, to structure the incentives facing politicaleconomic actors involved in monetary policy and wage/price bargaining. The agreed central result, theoretically surprising but empirically supported, is that even perfectly credible commitments to monetary conservatism have long-run real effects (even with fully rational expectations). These effects depend upon laborand goods-market institutional structure. The converse also follows: the real effects of labor-/goods-market institutional structure depend on the degree of credible conservatism reflected in monetary-policy rules. Nominal effects of both factors are similarly interactive.