Coalition governments, social insurance and central bank independence versus inflation: fighting inflation alone or together?

Coalition governments are at least as or even more capable of deflating than single party governments. This empirical observation and theoretical prediction contradicts veto actor and public goods theories which stress the collective action problems born in coalition governments causing delayed reforms. I argue that coalition governments were more responsive to the inflationary shocks of the seventies and eighties than single party governments because they resolved their collective action problem with policy trade-offs and mutual concessions. Deflations pose distributive dilemmas which are easier to resolve, in the longer run, in more inclusive political systems. When the parties in coalition put different weights in policies because they have different salient issues, policy consensus is possible through logrolling and policy tradeoffs. The result of this bargaining process is higher price stability along with higher social insurance. I test my argument on 18 OECD countries from 1972 to 1990 and I find that the more proportional the electoral law and thus the more inclusive the political system of a country is, the more social insurance played a crucial role in deflation. Moreover, this deflationary effect is independent of the level of wage bargaining coordination in the economy. On the other hand, in less proportional multiparty governments, central bank independence is also a necessary condition together with increased social transfers for successful deflations. I conclude that power division and power dispersion are both characteristics of coalition governments with distinct macroeconomic effects. ..PAT.-Conference Proceeding [ABSTRACT FROM AUTHOR]