Wage bargaining, central bank independence, and the real effects of money

The effects of financial capital mobility on monetary policy autonomy are relatively well understood, but the importance of particular monetary regimes in distinct national-institutional settings is not. This article is a theoretical and empirical exploration of the effects of monetary policy regimes on unemployment in different national wage-bargaining settings. Based on a rational expectations, two-stage game of the interaction between the wage behavior of labor unions and the monetary policies of governments, I argue that monetary policies have real (employment) effects in all but the most decentralized bargaining systems. Specifically, in intermediately centralized bargaining systems a credible government commitment to a non-accommodating monetary policy rule will deter militant wage behavior with salutary effects on unemployment. In highly centralized systems, by contrast, restrictive monetary policies will clash with unions' pursuit of wage-distributive goals and produce inferior employment performance. Only in highly fragmented bargaining systems is money "neutral'' in the sense that employment performance is unaffected by monetary regimes. The model has clear consequences for the optimal design of central banks and collective bargaining arrangements and suggests new ways to study institutional change (hereunder the causal effect of increasingly globalized capital markets). The argument is supported by pooled time-series data for fifteen OECD countries over a twenty-one-year period.