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Central Bank Independance and Coordinated Wage Bargaining: Their Interaction in Germany and Europe (WPS 48) Peter A. Hall.

Central Bank Independance and Coordinated Wage Bargaining: Their Interaction in Germany and Europe (WPS 48) Peter A. Hall.

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This paper explores the fashionable proposition that with a more independent central bank, a country can secure lower levels of inflation without higher unemployment. Han shows that the operation of the central bank depends on the character of wage bargaining. He illustrates this point with some cross-national data and an analysis of how coordinated wage bargaining is secured in Germany. He concludes by exploring the implications of this analysis for European Monetary Union.
This paper explores the fashionable proposition that with a more independent central bank, a country can secure lower levels of inflation without higher unemployment. Han shows that the operation of the central bank depends on the character of wage bargaining. He illustrates this point with some cross-national data and an analysis of how coordinated wage bargaining is secured in Germany. He concludes by exploring the implications of this analysis for European Monetary Union.

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11/19/2012

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CenrralBanklndependenceand
Coordinated
Wage Bargaining:
Their
Interaction
in
Gennany
and
Europe
by Peter
A.
Hall
Center for European Studies, Harvard University 
27
Kirkland Street Cambridge
MA 02138
WorkingPaper
Series #48
forthcoming in
German
Politics
and
Society
(1994)
AbstractThis paper explores the fashionable proposition that with a more independent central bank, acountry can secure lower levels of inflation without higher unemployment. Han shows that theoperation of the central bank depends on the character of wage bargaining.
He
illustrates thispoint with some cross-national data and
an
analysis of how coordinated wage bargaining issecured
in
Germany. He concludes
by
exploring the implications of this analysis for EuropeanMonetary Union.
 
1
CENTRAL BANK INDEPENDENCE AND COORDINATED WAGE BARGAINING:THEIR INTERACTION IN GERMANY AND
EUROPE
By Peter A. HallCenter
for
European Studies. Harvard UniversityThere has recently been a
wave
of
enthusiasm in Western Europe
for
reforms
to
make central banks more independent
from
national governments. Proposals
to
put
monetary policy in the hands
of
central banks beyond
the
control
of
politicalauthorities have received
wide support
in
the
European press. The FinancialTimes concludes
that:
"The argument
for
central bank independence ... appearsoverwhelming.
,1
The French have already initiated reforms
to
enhance
the
independence
of
the
Bank
of
France, and in 1993 a House
of
Commons
committee
began considering greater independence
for
the
Bank
of
England.2The European Community has taken a similar position. Its plans
for
monetary union envision a European Central Bank
(ECB)
whose
executive boardis
to
be appointed
for
eight year terms and forbidden
to
receive instructions
from
other
EC
or national institutions.
3
Although
European
Monetary
Union has beendelayed
by
popular discontent
with
the
Maastricht
Treaty
and by a recession
that
has made
the
requisite financial targets
difficult
to
attain, plans
for
EMU are stillproceeding on
the
premise
that
an independent central bank
will
enhanceEurope's economic well-being.
4
Most
of
the
enthusiasm
for
independent central banks rests on threepillars: a particular economic diagnosis, a specific model
of
success, and somesupporting econometric evidence.The relevant economic diagnosis
attributes
Europe's poor economicperformance in recent years
to
mismanagement
by
national political authorities.
 
2
It
is a
truism
of
modern politics
that
any
downturn
in
the
economy sets in
motion
the
search
for
a
culprit
and a cure. Everyone's favorite culprit in these cynicaltimes
is
the
political class--not
just
the
prevailing government
but
all politicians.
Now
more
than
ever,
they
are assumed
to
lack
the
good sense
or
strength
of
willnecessary
to
pursue
effective
economic policies.The cure
onto which
many have
fa~tened
is greater independence
for
the
central bank.
Their
argument is
that
politicians
may
be unable
to
impose
the
tight
monetary
policies
that
will
deter producers from agreeing
to
inflationary
wage settlements
because
they
seek reelection and so fear
the
higher levels
of
unemployment
that
tight
monetary policy
often
entails. By contrast,
it
is said
that
a central bank independent
of
any such concerns could administer
the
medicine,
however
distasteful, needed
to
keep
the
economy healthy.
The
model underpinning these propositions,
of
course, is
that
of
the
Federal Republic
of
Germany
which
has had
the most
independent central bank inEurope and a record
of
great economic success.
Many
attribute
the
low
rate
of
inflation in Germany
to
the
independence
of
the
Bundesbank.5Their hope is
that, by
acquiring an independent central bank
of
their
own, they
can duplicateGermany's success.A
growing
number
of
economic analyses
now
provide
further supportfor
this
position. Various economic theories have been adduced
to
explain
why
independent central banks should
be
advantageous, and many
econometric
studies find
that
nations
with
more independent central banks have
lower
rates
of
inflation than
do
those
whose banks are subject
to
more political
control.
6The
most
recent
of
these studies suggest
that,
where the central bank is more independent,
lower
rates
of
inflation can be secured
without
any
other
adverse economic
effects.
7
The purpose
of
this article is
to
question this conventional
wisdom.
ask a series
of
questions. Is central bank independence
the
only variable
that

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