Chapter 1: Wage Bargaining and Monetary Policy in the EMU: A Post Keynesian Perspective
* Eckhard Hein 1 INTRODUCTION Since the introduction of the European Monetary Union (EMU) in 1999 monetary policies for the euro area as a whole have been conducted by the Euro System with the European Central Bank (ECB) at its head. According to the Maastricht Treaty, the ECB’s primary goal is price stability. Only when price stability has been achieved ought the ECB to support economic policies of the European Union (EU). In choosing its precise goals and instruments the ECB is independent: it is free to deﬁne price stability and to apply the appropriate means to achieve it (Bean, 1998; Bibow, 2002a). This institutional design is based on the conviction that politically, economically and personally independent central banks are the solution to the ‘time inconsistency problem’ of monetary policy. According to this position, independent central bankers display a higher degree of conservatism concerning price stability and a higher degree of credibility in pursuing low inﬂation than democratically elected politicians. In this view the latter are prone to use ‘surprise inﬂation’ in order to boost employment, which will, however, only increase inﬂation expectations in the private sector without any long-run real positive effects on employment.1 Central bank independence is hence viewed to guarantee price stability as a ‘free lunch’, without real costs in terms of output, employment or growth.2 There are, however, major doubts whether time inconsistency should be considered the true cause of inﬂation and whether the role of independent central banks is adequately assessed...
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