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Institutions and Macroeconomic Performance: Central Bank Independence, Labour Market Institutions and the Perspectives for Inflation and Employment in the European Monetary Union

By Eckhard Hein

Abstract

Starting from a Post-Keynesian model in which employment is determined by effective demand and the NAIRU is viewed as a limit to employment, enforced by monetary policy reacting upon conflict inflation, the effects of central bank independence and labour market institutions on macroeconomic performance are considered and the perspectives for employment and inflation in the European Monetary Union are discussed. Central bank independence seems to be associated with stable prices and to prevent the rate of unemployment from falling below the NAIRU. But price stability also depends on labour market institutions. Horizontally and vertically co-ordinated wage bargaining allows for a considerable reduction of the NAIRU and hence of the real costs of price stability. Therefore, the perspectives for employment and inflation in the European Monetary Union depend on the development of the degree of co-ordination of wage bargaining and on the monetary strategy chosen by the independent European Central Bank. Different scenarios derived from these determinants are finally discussed

Year: 2001
OAI identifier: oai:CiteSeerX.psu:10.1.1.197.5610
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