Monetary policy implementation and transmission in the European Monetary Union

I discuss possible problems engendered by loss of national monetary policies, and study them from three empirical perspectives. First, are business cycles sufficiently synchronized across EMU member countries? The evidence suggests that economic activity in those countries has become increasingly correlated in the 1990s, and that policy co–ordination has played a role in generating that outcome. Second, are there asymmetries in the mechanisms through which policy affects economic activity? The paper documents that policy transmission was indeed heterogeneous in the member countries, and that structural and financial factors were sensibly related to cross–country differences in the response of output to a monetary policy shock. Third, how is policy implemented in an environment of diverse business cycle fundamentals and transmission mechanisms? Estimation of monetary policy reaction functions finds that the European Central Bank is closer to an aggregate of the central banks in Germany, France, and Italy than to the Bundesbank alone.     

Measuring business cycle comovements in Europe: Evidence from a dynamic factor model with time-varying parameters

Estimation results from a dynamic factor model confirm an increase in output synchronization across European countries during the run-up to the inception of EMU, but EMU by itself has not continued to foster the emergence of a common business cycle.     

Leader of the pack? German monetary dominance in Europe prior to EMU

In this paper, the monetary policy independence of European nations in the years before European Economic and Monetary Union (EMU) is investigated using cointegration techniques. Daily data is used to assess pairwise relationships between individual EMU nations and ‘lead’ nation Germany, to assess the hypothesis that Germany was the dominant European nation prior to EMU. By and large our econometric investigations support this hypothesis, and lead us to conclude that the only European nation to lose monetary policy independence in the light of monetary union was Germany. Our results have important policy implications. Given that the loss of monetary policy independence is generally viewed as the main cost of monetary unification, our findings suggest a reconsideration of the costs and benefits of monetary integration. A country can only lose what it has, and in Europe the countries that joined EMU — spare Germany — apparently did not have much to lose, at least not in terms of monetary independence. Instead, they actually gained monetary policy influence by getting a seat in the ECB's governing council which is responsible for setting interest policy in the euro area.     

Has the Euro changed the business cycle?

In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the Euro. Exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross-country correlations. To account for this finding, we develop a two-country business cycle model which is able to replicate key features of European data. In particular, the model correctly predicts a limited effect of EMU on standard business cycles statistics. However, further analysis reveals that the Euro has changed the nature of the cycle through its impact on the transmission mechanism. Cross-country spillovers have become relatively more, domestic shocks relatively less important in accounting for economic fluctuations under EMU. This explains why there is little change in unconditional volatilities.     

Business Cycle Synchronization in Europe: Evidence from a Dynamic Factor Model

This paper revisits the effect of the European Economic and Monetary Union (EMU) on the extent of business cycle synchronization across its member states. A dynamic latent factor model is used to identify the ‘regional’ effect of the euro area on output growth and inflation dynamics across European countries. The results of variance decomposition analysis confirm that both output growth and inflation tended to be more synchronized among European countries during the run-up to the EMU, but there is no strong evidence to support the argument that the ‘regional’ effects prevailed after 1999.     

Has the EMU reduced wage growth and unemployment? Testing a model of trade union behavior

Grüner (2010) argues that the introduction of the European Monetary Union (EMU) led to lower wage growth and lower unemployment in participating countries. According to Grüner, monetary centralization increases the amplitude of national business cycles, which leads to higher unemployment risk. In order to counter-balance this effect, trade unions lower their claims for wage mark-ups, resulting in lower wage growth and lower unemployment. This paper uses macroeconomic data on OECD countries and a difference-in-differences approach to empirically test the implications of this model. Although we come up with some weak evidence for increased business cycle amplitudes within the EMU, we neither find a significant general effect of the EMU on wage growth nor on unemployment.     

BUSINESS CYCLE,CURRENCY AND TRADE,REVISITED

This paper provides long‐run historical evidence for the link between business cycle synchronization, trade and the exchange rate regime. Using data from a large number of industrialized countries and a group of Asian economies, we examine this link in three sub‐periods: the first globalization period (1870–1913), the bloc economy period (1915–1959) and the second globalization period (1960–2004). The business cycle is identified as the series of deviates from a Hodrick–Prescott filtered trend. Cyclical turning points are located in the business cycles of our sample of 21 major countries, which enables us to comment on the characteristics of business cycles in the three periods. Cross‐correlations of the cyclical deviates are calculated for all the pairs of the 21 countries examined. It is apparent from casual inspection that the business cycle characteristics and the pattern of cross‐correlations in the bloc economy period are different from those found for the two globalization periods, whereas there is less difference between the two globalization periods. Following the estimations by Frankel and Rose, we relate business cycle synchronization to trade patterns and currency unions. Consequently, we find that European integration was already discernible in terms of business cycle synchronization in the early 1900s and that a similar synchronization was not discernible for Asia.     

Determinants of business cycles in small scale macroeconomic models: the German case

We identify measures of shocks to total factor productivity and preferences from two real business cycle models and subject them to Granger causality tests to see whether they can be considered exogenous to other plausible sources of the German business cycle. For West German data from 1960.i to 1989.iv we conclude that our measures of shocks are indeed exogenous. This contrasts with similar studies for other countries that question the exogeneity of either productivity or preference shocks. For the period 70.i to 01.iv we find that M3 Granger causes all of our shock measures. We attribute this to the breaks in our time series associated with the German reunification in 1990 and the European Monetary Union in 1999.Earlier versions of this paper circulate as University of Augsburg economics discussion paper no. 213 and Kiel Institute for World Economics working paper no. 1158, respectively.     

Wages and prices in Europe before and after the onset of the Monetary Union

This paper investigates possible structural changes induced by the Euro on the relations among wages, prices and unemployment for the five major European economies. The dynamic adjustment and the level relations are found to be different across subperiods as well as across countries. During the European Economic and Monetary Union (EMU) period, there is evidence of a conventionally-sloped Phillips Curve for the four economies within the EMU, with a higher degree of homogeneity with respect to the pre-EMU period; the UK presents instead a positively-sloped Phillips Curve in the EMU period. In this latter period, deviations from reference values are found to influence unemployment for all countries, including the UK. Only for Germany and Spain, instead, we find evidence that deviations from reference values influence inflation dynamics.     

Return and volatility transmission between oil prices and oil-exporting and oil-importing countries

This paper provides further evidence of the comovements and dynamic volatility spillovers between stock markets and oil prices for a sample of five oil-importing countries (USA, Italy, Germany, Netherland and France) and four oil-exporting countries (United Arab Emirates, Kuwait, Saudi Arabia and Venezuela). We make use of a multivariate GJR-DCC-GARCH approach developed by Glosten et al. (1993). The results show that: i) dynamic correlations do not differ for oil-importing and oil-exporting economies; ii) cross-market comovements as measured by conditional correlation coefficients increase positively in response to significant aggregate demand (precautionary demand) and oil price shocks due to global business cycle fluctuations or world turmoil; iii) oil prices exhibit positive correlation with stock markets; and iv) oil assets are not a good ‘safe haven’ for protection against stock market losses during periods of turmoil.     

The Productivity Slowdown Puzzle. Technological and Non-technological Shocks in the Labor Market

Abstract

In this paper we examine the relationships between business cycles in the G7 countries. We focus on whether recessionary periods in one country are independent of the timing of recessions in other countries in the G7, using three different methods for dating recessions. We find that the evidence is mixed on whether phases of the business cycle in North America and in European countries are independent, or whether there is a common phase structure in the business cycle across all the G7 economies. NBER dates suggest that business cycles are synchronised, while other methods for generating business cycle chronologies are more consistent with regional, rather than international cycles. We also find mixed evidence on whether the UK is synchronised with European countries, while Japan quite clearly has the cycle that is most independent of other G7 countries.     

Are business cycles asymmetric? Some European evidence

Economic thought has often regarded business cycles as asymmetric. This study examines the existence of asymmetries over the business cycle in seven European countries: France, Germany, Ireland, Italy, Luxembourg, The Netherlands and the United Kingdom. To analyse this issue, industrial production in these countries from 1957 to 1998 is examined, and quarterly contractions and expansions in this variable are compared. The results obtained with both parametric and non-parametric methods allow the existence of asymmetries in these countries to be questioned.     

Measuring fiscal spillovers in EMU and beyond: A Global VAR approach

This paper identifies and measures fiscal spillovers in the EU countries empirically using a global vector autoregression (GVAR) model. Our aim was to look at the sign and the absolute values of fiscal spillovers in a countrywise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy shocks originating in Germany and France. However, there is significant variation regarding the magnitude of the spillovers on individual destination countries and country clusters. Furthermore, we find some evidence that German or French fiscal spillovers are stronger on EMU than on non‐EMU countries.     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.     

The Endogeneity of the Optimum Currency Area Criteria, Intra-industry Trade, and EMU Enlargement

This article tests the endogeneity hypothesis of optimum currency area (OCA) criteria in a cross-section of OECD countries in the 1990s. It argues that intraindustry trade induces convergence of business cycles, while no direct relation between business cycles and bilateral trade intensity is found. This finding confirms the OCA endogeneity hypothesis, but it underlines the role of trade specialization. Furthermore, the endogeneity of OCA criteria implies a comparable degree of business cycle harmonization of Central and Eastern European countries with the EU as for the current members in the medium run. (JEL F15 , F41 )     

The last fifteen years of stagnation in Italy: a business cycle accounting perspective

In this paper, we investigate possible sources of declining economic growth in Italy beginning near the middle of the 1990s. A long-term data analysis suggests that the poor performance of the Italian economy cannot be blamed on an unfortunate business cycle contingency. Other countries of the euro area have shown better performance, and the macroeconomic data indicate that the Italian economy has not grown at the same rate as these other European economies. We investigate the sources of economic fluctuations in Italy by applying the business cycle accounting procedure introduced by Chari et al. (Econometrica 75(3):781–836, 2007). We analyze the relative importance of efficiency, labor, investment and government wedges for business cycles in Italy during the 1982–2008 period. We find that individual wedges have played different roles during this period; however, the efficiency wedge is shown to be the factor most responsible for the stagnation phase that began in approximately 1995. Our findings also show that the decline in labor market distortions that occurred in Italy during the 1990s alleviated the stagnation effect somewhat and prevented an even more abrupt slowdown in per capita output growth.     

Fiscal Convergence, Business Cycle Volatility, and Growth

This paper analyzes the effects of fiscal convergence on business cycle volatility and growth. Using a panel of 11 EMU and 21 OECD countries and 40 years of data, we find that countries with similar government budget positions tend to have smoother business cycles. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with smoother business cycles. We also find evidence that reduced business cycle volatility through higher fiscal convergence stimulates growth. Our empirical results are economically and statistically significant, and robust.     

The transmission mechanism of business cycles among Germany,Japan, the UK and the USA

The study analyses the interdependent relationships of business cycles among four major countries using LA-VAR methods. The results are compared with results obtained using a standard VAR model. For the total sample (1962–1995), it is found that the economies of individual countries move independently and that inter-dependence is weak. However, causality from the USA to Japan, and from Japan to Germany can be observed. It is also found that the ripple effect differs in the first (1962–1973) and second (1973–1995) sample periods. A change in the international ripple effect on the business cycle may have occurred at the time of the first oil crisis. These results are almost robust to the empirical techniques employed in the analysis.     

The Euro Area,a Stressful Monetary Union? Learning from Newspapers’ Monetary Policy Coverage

Through a textual analysis of national newspaper articles covering European central bankers’ statements and policy decisions from 1999 to 2011, I derive the concerns expressed by national media in the Economic and Monetary Union (EMU). I consider these concerns as a benchmark for national preferences, and thus for the preferences of national central bankers in the EMU. I also test the existence of groups of national media (i.e., national publics) according to their shared expressed concerns. The results show that in the euro zone, similar concerns are shared by different country groups, corresponding to a group of countries from Northern Europe (Belgium, Finland, and the Netherlands), Southern Europe (Spain and Portugal), and the Periphery (Italy, Greece, and Ireland), but that there are two isolated countries (France and Germany), whose newspapers do not share the issues raised by the rest of the European newspapers. This approach provides further insights into the potential heterogeneity of the European central bankers inside the Governing Council of the ECB in terms of policy preferences.     

Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964–2003 period, we evaluate how cross‐country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross‐country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross‐country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement.