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5.1 Program for the Study of Germany and Europe

Central Bank Independence, Sectoral Interest, & the Wage Bargain

1995 – Robert J. Franzese


Much recent research in the fields of political science and economics has been devoted to the subjects of coordination in wage bargaining (CWB) and central bank independence (CBI). In this paper, I analyze the employment effects of central bank independence in a model of the open economy with varying degrees of coordinated wage bargaining. Contrary to much recent litera­ ture, I find that CBI, even if perfectly credible, has employment effects the sign and size of which depend upon the coordination of wage bargaining and upon the sectoral (traded, non­ traded private, and public) composition of employment in the economy. That is, the effects of CBI, CWB, and sectoral composition on unemployment are interactive. I derive these hypotheses from a simple open-economy Keynesian model and test them on decade-frequency data from twenty OECD countries. The results are favorable.