Multiple wage-bargaining systems in the single European currency area

Little attention in the EMU literature has been paid to theinteraction between central bank monetary rules and systemsof collective wage bargaining. Analytically and empirically,coordinated wage-bargaining systems respond with real wage restraintto non-accommodating monetary policy. Since wage determinationis dominated by collective bargaining in all the EMU memberstates and wage coordination within the member states has grownsince 1980, this is a topic of potential importance. In particular,the replacement of the Bundesbank, directly targeting Germaninflation, by a European Central Bank (ECB) targeting Europeaninflation will remove a major institutional support of wagerestraint in Germany. The consequences of this for EMU are workedout under two scenarios, that inflation expectations will begenerated by ECB monetary policy and that they will reflectGerman inflation outcomes. Possible institutional developmentsare discussed including government union bargains. The Bundesbankalso played a major role in maintaining fiscal rectitude: forunderlying structural reasons, therefore, it is possible thatGermany will move to a period of fiscal activism with wage restraintand low inflation purchased through social contract negotiations.     

Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB

This paper examines the conditions for fiscal restraint to emergeas Nash equilibrium in the game between fiscal authorities ina monetary union and discusses the implications for the ECB'smonetary strategy. We show that fiscal authorities fail to internalizethe adverse area-wide effects of their policies when the ECBtargets union-wide aggregates. To address this co-ordinationfailure, we propose that the ECB reacts to fiscal restraintby implementing a monetary reward. Applying the pareto- andrisk dominance criteria to the ensuing co-ordination game, weshow that the ECB can ensure convergence upon fiscal restraintby adopting a weakly countercyclical reaction function.     

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.     

欧洲央行的最后贷款人角色

欧债危机爆发后,欧洲央行一直在是否充当政府债券市场最后贷款人的问题上摇摆不定。笔者认为,货币联盟中的政府债券市场存在缺陷,很容易爆发流动性危机,只有中央银行做出最后贷款人的承诺才能解决这一问题。文章对以通胀风险、财政影响、道德风险、白芝浩理论、法律异议为理由反对欧洲央行为政府债券市场提供最后贷款支持的声音,进行了逐一驳斥,建议:为了维护金融稳定,欧洲央行必须公开声明将在政府债券市场上坚定不移地履行最后贷款人职责。     

One Money and Sixteen Needs: Has the ECB’s Monetary Policy Become More Balanced Towards the Needs of the Member States?

In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union. We show that the ECB, if in existence in the 1990s, would have had an impossible task. This is because inflation and business cycles still strongly differed in that time, although convergence substantially increased in the run up to the monetary union. In this respect, the decade under EMU drastically differs from the preceding one. This being said, the evidence for a further improvement in the course of the first decade of the new millennium is mixed. This is because although inflation has further converged, business cycles have shown a tendency for increased divergence. If, however, we are willing to put weights on inflation and output gap divergence (as implied by the Taylor rule), we conclude that also in the course of the period under EMU in general the ECB’s monetary policy has become more in line with the needs of the individual members. Looking at individual countries, we show that during the first decade of its existence the ECB’s interest rate was most fitted to the needs of France and Italy, and least to the needs of Ireland and Greece (both too low) and Germany (too high). To a lesser extent there were also mismatches for Spain and Portugal (both too low). In the more recent period since 2005, the mismatch between the desired domestic interest rate and the desired ECB rate has come down for most countries (most noticeable Germany). For Belgium (for which a higher interest rate was more appropriate), on the other hand, the mismatch increased. These overall positive findings, however, offer no guarantee that the task of the ECB will become easier in the future.     

Cooperative Monetary and Fiscal Policies in the Euro Area

This article discusses the interaction of fiscal and monetary policy in the euro area. Though many observers suggest a fiscal union as the next step of euro-area constitutional reform, a federal fiscal union does not appear politically feasible in the short run. We suggest moving forward with cooperative monetary and fiscal institutions and policies that allow for decentralized fiscal decisions, while taking federal stabilization policies into account. This approach will increase the probability of survival of the euro area compared with the current fiscal arrangements. Using a dynamic macro model, counterfactual simulation paths of our cooperative solution are contrasted with time-series data for the euro area.     

Uncertainty and Fiscal Policy in an Asymmetric Monetary Union

We examine monetary and fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. It is first shown that monetary uncertainty discourages excessive taxation and may thus reduce average inflation and output distortions. However, as countries enter the monetary union, this tax-restraining effect of uncertainty is mitigated. The monetary union may hence lead to higher fiscal distortions in some member countries, depending on governments’ spending targets and on the change in the degree of uncertainty implied by common monetary policy.     

Monetary and Fiscal Policy Design in the EMU: An Overview

The interaction of monetary and fiscal policies is a crucial issue in a highly integrated economic area such as the European Union. This paper analyzes the design of monetary and fiscal policies in the EMU. To do so, the paper starts with an overview of the most important aspects. Next, it analyzes monetary and fiscal policy interaction in a stylized model of a monetary union, in which monetary and fiscal policy design is modeled as a dynamic stabilization game. Macroeconomic policy making and adjustment are studied under alternative forms of cooperation and in both symmetric and asymmetric settings.     

Macroeconomic effects of financial stress and the role of monetary policy: a VAR analysis for the euro area

This paper analyses an otherwise standard macro-financial VAR model for the euro area that includes - apart from conventional measures of output, inflation and monetary policy - a composite indicator of systemic financial stress, namely the CISS index, and total assets of the ECB balance sheet capturing the stance of unconventional monetary policy. I find that the CISS contributes significantly to the dynamics of the macroeconomy and exerts a strong influence on monetary policy when looking at both policy rates and the ECB balance sheet. The significance of the CISS appears robust to the inclusion of a broad set of real and financial control variables. Based on tests of direct versus indirect (Granger-)causality patterns proposed in Hsiao (1982), I also find that unlike unconventional policy as measured by ECB balance sheet growth, the policy rate does not seem to react directly to variations in financial stress but rather indirectly through the impact of financial stress on macroeconomic conditions. These different patterns of reaction are broadly consistent with the ECB’s “separation principle”. The estimated effects of the ECB’s standard and non-standard policy measures on inflation and economic growth are moderate, although an easier stance in both policy tools helps calm down financial stress.     

The assessment: macroeconomic policy after EMU

In this paper we discuss the emergence of the new European macroeconomicstructure within EMU. We focus on three important elements:the wage-fixing authorities in each country, the fiscal authoritiesin each country, and the single European Central Bank (ECB).We identify serious problems which might arise in coordinatingboth the wage-setters and the fiscal authorities, and arguethat these problems could be exacerbated if the ECB conductsmonetary policy inappropriately. In the light of this we providerecommendations for the conduct of monetary policy by the ECB.The paper also briefly discusses financial stability issuesand the interaction between the countries in EMU and the restof the world.     

Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies?

Could a monetary union in West Africa (either an informal monetaryunion of the non-CFA countries, or a possible future monetaryunion of all ECOWAS members) be an effective ‘agency ofrestraint’ (Collier, 1991) on fiscal policies? We discussthe ways, both positive and negative, that monetary union couldaffect fiscal discipline and the arguments for explicit fiscalrestraints considered in the literature about the European MonetaryUnion (EMU), and consider their applicability to West Africa.The empirical evidence, EMU literature and CFA experience allsuggest the possibility that monetary union could create thetemptation for fiscal profligacy through prospects of a bail-out,or costs that are diluted through the membership. We concludethat a monetary union in West Africa can be an effective agencyof restraint on fiscal policies only if the hands of the fiscalauthorities are also tied by a strong set of fiscal restraintcriteria, applicable not just for accession to monetary union,but throughout the life of the union.     

Monetary policy in the Euro area – lessons from the first years

This paper investigates in a consistent semi-structural empirical framework three current issues of monetary policy in the euro area. First, regarding policy transmission we offer a three-stage procedure to combine the estimation of economic structure prior to EMU with current ECB monetary policy. Second, we test whether the regime change leads – before or after – EMU to structural instability. Third, we investigate the stance of monetary policy in Europe. We compare a counterfactual ECB reaction function based on average interest rates prior to EMU with actual ECB policy. Furthermore, we analyse actual ECB policy with interest rate projections using Bundesbank reaction functions and euroland data.We thank two anonymous referees, participants of the Royal Economic Society Conference in 2003, the Money, Macro, and Finance Annual Conference in 2002, research seminars at the Universities of Augsburg, Bochum, Bonn, Frankfurt and Bloomington/Indiana for helpful comments. Obviously, we are responsible for all remaining shortcomings.     

Fiscal Rules in a Monetary Union: A Short-Run Analysis

This article challenges the conventional result according to which an instrument-independent central bank able to strictly commit to price stability makes fiscal constraints unnecessary. We present a model of a monetary union with heterogeneous members where the inefficient policy mix resulting from the lack of coordination between the common monetary policy and national fiscal policies incites the governments to appoint excessively liberal delegates to the central bank's board. We characterize the fiscal restraints necessary to restore the central bank's ability to deliver the most desirable degree of price stability. It appears that even country-specific and state-contingent restraints may be counterproductive for some member states.     

Is it really more dispersed?

The ECB’s one size monetary policy is unlikely to fit all euro area members at all times, which raises the question of how much monetary policy stress this causes at the national level. I measure monetary policy stress as the difference between actual ECB interest rates and Taylor-rule implied rates at the member state level. These rates explicitly take into account the natural rate of interest to capture changes in trend growth. I find that monetary policy stress within the euro area has been steadily decreasing prior to the recent financial crisis. Current stress levels are not only lower today than in the late 1990s, they are also in line with what is commonly observed among U.S. states or pre-euro German Länder.     

What are the Trade Spill-Overs from Fiscal Shocks in Europe? An Empirical Analysis***

We use a Vector Auto Regression (VAR) analysis to explore the (trade spill-over) effects of fiscal policy shocks in Europe. To enhance comparability with the existing literature, we first analyse the effects of these shocks at the national level. Here, we employ identification based on Choleski decomposition and a structural VAR, both of which lead to the same results. Then, we turn to study the cross-border spill-overs of fiscal shocks via the trade channel. Fiscal expansions in Germany, France and Italy lead to significant increases in imports from a number of European countries. In order to mimic the case of monetary union, we also shut off the effects via the short-term interest rate and the nominal exchange rate and find a slight strengthening on average of the cross-country spill-overs from a fiscal expansion. These results suggest that it may be worthwhile to further investigate the possibility of enhanced fiscal coordination.*** This research is part of the RTN project ‘Macroeconomic Policy Design for Monetary Unions’, funded by the European Commission (contract number HPRN-CT-2002-00237). We thank two anonymous referees, a referee for the ECB Working Paper series, Peter Claeys, David-Jan Jansen, Franc Klaassen, Roberto Perotti and audiences at the Dutch Central Bank and the CEPR/CREI Conference ‘Designing a Macroeconomic Policy Framework for Europe’ (Barcelona, 2004) for many helpful comments. A large part of this paper was written while Beetsma was visiting the Directorate-General for Research of the ECB. He thanks the ECB for the stimulating research environment. The views expressed in this paper are those of the authors and do not commit any of.cial institution. The usual disclaimer applies.     

Brussels on a single money

This review article discusses the recent document titled “One Market, One Money” in which the European Commission develops its case for European monetary union. After examining the monetary issues as such, the article focuses on the reasons for the Commission's very worried attitude about fiscal policy autonomy. The closing section considers the problem of the transition to a single money. Attention is also called to the issue of a lender of last resort.     

Fiscal Policy and Macroeconomic Stabilizations: What are the Gains from Cooperation?

In this paper we extend the open-economy stochastic framework of Obstfeld and Rogoff (Q J Econ. 117:503–36, 2002) to include distortionary taxation, when prices are flexible but wages are sticky. We use the model to analyze the optimal design of tax rules that respond to productivity shocks, under non-cooperation and cooperation between the fiscal authorities, and evaluate the gains from coordination. We show that, although monetary policy would be preferred to fiscal policy as a stabilization tool both under competition (Nash) and under cooperation, there is a role for procyclical fiscal stabilization in a monetary union where the monetary authority cannot respond to asymmetric shocks. Moreover, we show that in the Nash game there will be an incentive for the fiscal authorities to try to manipulate the terms-of-trade in their favor, and we estimate the potential gains from fiscal policy coordination. The size of the gains depends crucially on the value of the Frisch elasticity of labor supply. For lower values of the Frisch elasticity (more in line with microeconometric estimates) the gains are relatively small, but for more elastic labor supplies (more in agreement with the business cycle literature) the gains can be very large.

Fiscal policy independence in a European Monetary Union

Do plans for a monetary union in Europe call for limits on the freedom of the country members of the union to use fiscal policy? In order to provide a tentative answer, we simulate the IMF model MULTIMOD, given various shocks, in the case of a European Monetary Union consisting only of France and Germany. The results clearly indicate the possible value of allowing unfettered use of fiscal policy in both countries. The reasons lie partly in differences in the initial position of the two, partly in differences in their preferences. We also examine the change in the policy significance of the current account in the monetary union. Current account imbalances clearly cease to have the same significance in a monetary union; but they do not therefore become irrelevant.     

EMU Stability: Direct and Indirect Risk Sharing

Our paper aims to analyze the effectiveness of different risk-sharing mechanisms in providing stability to a monetary union. We select two stylized tools with extreme and opposite features. The first is an expansionary but conventional monetary policy that is used to help EMU’s most fragile member states manage their public debts; the second is a centralized fiscal policy that allows for the transfer of a portion of these public debts from EMU’s most fragile member states to those considered EMU’s “core”. By a stylized periphery-core model of a monetary union, we compare the strengths and weaknesses of these two tools in order to reach some welfare implications in terms of union stability.     

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.