Strategic Interactions Among Central Bank and National Fiscal Authorities in a Monetary Union Subject to Asymmetric Country Shocks

In this paper we extend Nordhaus’ (Brookings Pap Econ Act (2):139–199, 1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that, even assuming that the monetary and the fiscal authorities share the same ideal targets, in the presence of asymmetric shocks the “symbiosis” result found by Dixit and Lambertini (J Int Econ 60:235–247, 2003) no longer obtains. Thus, fiscal rules as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact may work as monetary/fiscal coordination devices that improve welfare. The imposition of common targets, however, may work as a substitute for policy coordination only if these are made state contingent, an aspect that the recent version of the Stability and Growth Pact takes into account in a more appropriate way than its original version.

Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve

In this paper we apply a static version of a New Keynesian macromodel to a monetary union (see Bofinger et al., J Econ Educ, 37:98–117 (2006), Walsh, J Econ Educ, 33:333–346 (2002)). We show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents national interest rates from driving a wedge between macroeconomic outcomes across member states. In particular small countries are in need for fiscal policy as an independent stabilization agent with room to breath.

FTPL-Perspective on Tradable Deficit Permits in the EMU

The Growth and Stability Pact restricts member states in their fiscal policy but also causes inflexibility in the pursuit of wide-ranging economic and social reforms. Tradable deficit permits allow more flexibility for individual member states and provide a stick for those who exceed the deficit limit but also a carrot to those who stay below it. But does the trade in deficit permits affect the monetary objectives of the European Central Bank (ECB)? We argue that from a perspective of fiscal theory of the price level, trade in deficit permits can lead to higher inflation depending on the growth rate and the debt/GDP ratio of the member states.     

A New EU Member Country on the Road to the Euro Area: Monetary and Fiscal Policies for Slovenia

Slovenia was the first of the ten new EU member states to enter the Euro Area on January 1, 2007. It was an explicit objective of Slovenian policy-makers to introduce the euro as early as possible. Slovenia was participating in the exchange rate mechanism ERM-II since June 2004. This paper analyses whether the choice of participating in the ERM-II soon after EU accession was the best strategy in terms of the macroeconomic performance. It is shown that a better overall economic performance could have been achieved under a crawling peg regime allowing a depreciation of the Slovenian tolar (SIT) before introducing the euro in 2007. The worst policy results are obtained when the exchange rate is totally fixed at an early stage of EMU integration. The labor market performance can be significantly improved by cutting income taxes and social security contribution rates.      

Global Implications of Monetary and Fiscal Policy Rules in the EMU

In order to analyze successful strategies for economic policy in a global environment both international interdependencies and the strategic behavior of global players must be considered. We use a global model of the world economy (the MSG2 Model) to show the effects of dynamic policy optimization in the presence of various supply and demand shocks to different world regions. We show that fixed rules are generally superior for supply shocks, while demand shocks call for more active or discretionary policies.     

The origin and diffusion of shocks to regional interest rates in the United States, 1880-2002

This paper is about the behavior of regional interest rates in the United States from 1880 to 2002. The main concern is with the shocks to regional rates. Where did they originate? How did they diffuse? How did the pattern change over time? We show that in the late nineteenth century the main source of shocks to rates on the periphery were shocks originating on the periphery itself. This pattern continued through World War I and the Great Depression. After World War II, however, the importance of disturbances on the periphery diminished and shocks to rates in the Eastern financial centers became the main source of fluctuations in all regions.     

The enlargement of the euro area: what lessons can be learned from EMU?

This paper investigates what lessons may be learned from EMU for the enlargement of the euro area. It examines the situation of present and prospective EU countries in respect of nominal and real convergence. It suggests that fulfilling the EMU criteria consistently over the next few years will require huge efforts by prospective EU countries, with important output and employment losses. The possibility that present EU countries would have to bear part of these costs cannot be ruled out, with the risk of provoking tensions within the EU, in particular as regards the ‘one-size-fits-all’ monetary policy decisions of the ECB.     

The Effects of the European Economic and Monetary Union (EMU) on National Fiscal Sustainability

This paper presents a methodology to analyze the responsiveness of fiscal sustainability to the endogenous fiscal discipline that will be strengthened by the EMU. This discipline arises in response to the harmonization of tax systems, the loss of control of current and prospective money financing, and the deepening of financial market-based discipline. The model developed in this paper is a generalization of Blanchard's 1984 model, in which the interest rate is determined endogenously. This provides the framework to analyze more features of the linkage between sustainability and endogenous fiscal discipline. This paper also presents a new intratemporal fiscal sustainability index.     

Designing Fiscal Institutions in a Monetary Union

This article explores the policy and wealth consequences of alternative institutional arrangements through which fiscal policy interacts with monetary policy in a monetary union such as the EMU. The central issue of the article is the design of the appropriate monetary and fiscal institutions through a comparison of alternative arrangements to distribute power over monetary and fiscal authorities between the central authority of the union and the individual members of the union and evaluating their performance. The main results of this article reveal that delegation of the fiscal policy to a council of country representatives and the monetary policy to a council of governors is the appropriate institutional design to reduce inflation bias and better stabilize regional, idiosyncratic supply and demand shocks in a monetary union.     

Fiscal Consolidations in the Central and Eastern European Countries

We study fiscal consolidations in the Central and Eastern European countries and what determines the probability of their success. We define consolidation events as substantive improvements in fiscal balances adjusting for the impact of cyclical effects. We use logit models for the period 1991–2003 to assess the determinants of the success of a fiscal adjustment. The results seem to suggest that for these countries expenditure based consolidations have tended to be more successful. By contrast, revenue-based consolidations have a tendency to be less successful. JEL no. C25, E62, H62     

Fiscal policy and direct crowding-out in a small open economy

This paper analyses the welfare effects of fiscal policy in a small open economy, where private and government consumption are substitutes in terms of private utility. The main findings are as follows: fiscal policy raises output, bringing it closer to its efficient level, but is not welfare-improving even though government spending directly affects private utility. The main reason for this is that the introduction of useful government spending implies a larger crowding-out effect on private consumption, when compared with the ‘pure waste’ case. Utility decreases since one unit of government consumption yields less utility than one unit of private consumption. In any case, the marginal rate of substitution between private and government consumption is a key parameter in governing the welfare effects of fiscal policy.

当前中国宏观经济政策分析

2008年以来,中国经济增长面临着巨大挑战。本文对近两年来中国宏观经济政策进行了梳理,指出中国宏观经济调控中出现的问题并提出政策建议。     

International monetary policy cooperation in economies with centralized wage setting

We consider a standard two-country monetary policy game with fixed nominal wage contracts. The policy regime is either non-cooperative or cooperative. We extend conventional analyses by deriving the natural rate of employment endogenously through monopoly union decision-making. As unions attempt to affect the real exchange rate, wages are set inefficiently high. Such attempts are shown to be strongest under monetary cooperation. Therefore, in comparison with non-cooperation, employment is lowest, and, in effect, consumer price inflation is highest, under monetary cooperation, i.e., international monetary cooperation is disadvantageous.     

An experiment with multiple currencies: the American monetary system from 1838–60

This paper finds that the combination of state regulated bank notes and deposits acting as the principal form of money and heterogeneous bank laws in the antebellum United States led to a loosely fixed exchange rate system where states were capable of exercising limited independent monetary policy. It finds that bank note circulation and deposits moved differently across the states, and based on narrative evidence, it seems states were aware of their ability to affect the money supply of their economies and that some states did in fact try to change their banking systems to do so.     

Fiscal policy in monetary unions: Implications for Europe

This paper analyzes how the feasible mix of government expenditure and financing arrangements may change with the establishment of a monetary union such as that planned by members of the European Community. We find that a monetary union reduces the feasible divergence across countries in their present discounted levels of fiscal spending. Wide differences across countries in their present and future time patterns of spending are still possible, however. Examination of the empirical evidence suggests that the movement toward greater exchange rate fixity associated with the EMS and participation in quasi monetary unions havenot been accompanied by significant fiscal convergence. The experience of member states of several existing monetary unions, however, suggests that a more effective constraint to budgetary discipline arises within full-fledged unions in operation over long periods, even in the absence of binding central rules on government deficit and debt positions.     

Bank cooperation and banking policy in a monetary union: A political-economy perspective on EMU

Why do large European banks lobby for monetary union? We show in a game-theoretic model that montary union can trigger a change in the structure of the market for international banking transactions with asymmetric effects on profits: large banks are induced to cooperate internationally and gain from European Monetary Union (EMU), while small banks are likely to lose. Monetary union can be interpreted as a device for large banks to push small banks out of the market for cross-border financial services.     

Inflation Targeting as a Coordination Device

The paper analyses inflation targeting when two independent policy authorities (a central bank and a National Government) have divergent preferences for the optimal policy mix. We demonstrate that the main advantage of inflation targeting, as a policy regime, is that it represents a simple proxy for full coordination between policy authorities. Inflation targeting therefore helps because it reduces the conflicts between fiscal and monetary policy, expecially where there are strong spillovers between the two policies. These results are then tested, and largely validated, in a simulation framework using a small open economy calibrated model.