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.     

Monetary policy,heterogeneous population and inflation

Adding heterogeneity to an otherwise simple model results in a deviation from the Friedman rule. We show that a central bank concerned with inequality delivers an outcome below the Pareto frontier. Our results may shed light as to why central banks around the world do not follow the Friedman rule and instead deliver positive inflation rates. On the other hand, the calibrated model indicates that the implied optimal inflation rates are much higher than those observed in the data. One possible interpretation of our results is to question the recent wisdom of thinking of inequality as part of central banks’ concerns.     

Exchange rate policy during transition to the European Monetary Union: The option of euroization

Countries of central eastern Europe which are candidates for accession to the European Union face fundamental challenges in the conduct of macroeconomic policies. These countries are characterized by growth rates faster than those of EU countries, along with large current account deficits and an equilibrium appreciation of the real exchange rate. In such a context, an early adoption of the euro may be beneficial to central eastern European countries, while the ERM‐II system and the Maastricht criterion on inflation may give rise to serious drawbacks for candidate countries. JEL classification: F15, F41     

欧洲经货联盟货币政策和财政政策协调理论研究综述

欧洲经货联盟货币政策和财政政策协调是国际宏观经济政策协调的重要组成部分。随着欧洲经货联盟的远行，国际宏观经济政策协调理论的研究重点开始转向欧盟的经济政策协调。本文对经货联盟建立前后有关货币政策协调、财政约束与协调、财政政策与货币政策协调、动态不一致性等问题的研究进行了回顾。     

The Economic Case for Monetary Union in the European Union

Differential requirements for seigniorage provide a weak case for retaining monetary independence. As regards adjustment to asymmetric shocks, nominal exchange rate flexibility is at best a limited blessing and at worst a limited curse. Absence of significant fiscal redistribution mechanisms among EU members is not an obstacle to monetary union. Neither is limited international labour mobility. Convergence of real economic performance is irrelevant for monetary union. A common currency is the logical implication of unrestricted capital mobility. The Maastricht criteria need not hinder monetary union provided the political will exists to adopt a flexible interpretation of the fiscal criteria.     

Out in the cold? Iceland's trade performance outside the European Union and European Monetary Union

Although entering currency (and customs) unions involve bothcosts and benefits, an increasing body of research is findingthat the benefits—in terms of international trade creation—areremarkably large. Focusing simply on the European Monetary Union(EMU) rather than the broad range of currency unions studiedby other authors, we find that the trade impact of EMU is smaller,but still substantial. Our findings suggest that the Iceland'strade could increase by about 60% and that the trade-to-GDPratio could rise by 12 percentage points should Iceland jointhe European Union and EMU.     

Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics

We do two things in this paper. First, we look at some simple models of monetary decision making in a monetary union and ask how much more variable a country's output and inflation is likely to be if it joins the union. We answer this analytically and then go on to 'calibrate' the simple model. The model has few structural equations, but it is useful in allowing us to examine how the variability of output and inflation are likely to change as key parameters change. Our conclusions on this front are likely to be sensitive to model specification. However, we also identify a second best issue concerning the optimal make–up of the monetary union which is likely to be more robust: namely that only when all members of the union have the same structural parameter values (and shocks are perfectly correlated) will it be optimal for a new member to have these same structural parameter values.     

Monetary and Fiscal Policy-Makers in the European Economic and Monetary Union: Allies or Adversaries?

Optimal monetary and fiscal policies within the European Economic and Monetary Union (EMU) are determined by simulating a global model under alternative assumptions about the objective function of the European Central Bank (ECB) and about cooperation vs. non-cooperation between monetary and fiscal policy-makers and among the latter. The results show the high effectiveness of fixed rules in the presence of supply-side shocks and the usefulness of cooperative discretionary measures against demand-side shocks. More generally, cooperation among fiscal policy-makers in the EMU is nearly always superior to non-cooperative equilibrium solutions, yielding a strong case for the coordination of fiscal policies.     

The impact of China's imports on European Union industrial employment

As the EU's biggest supplier of imported goods and a second trading partner, China has become an increasingly important actor on the global economic scene. This paper reports new evidence through analyzing whether the EU labour market is affected by exposure to imports from China. Drawing on a panel dataset of 27 EU countries, over the 2003–2013 period, and using the pooled mean group estimator, the results show that imports from China have a negative effect on industrial employment. This result holds separately for the all analyzed categories: all products, manufactured products as well as for the sub‐groups.     

Another look at momentum crashes: momentum in the European Monetary Union

This article studies the profitability of a selection of prominent momentum-based strategies in the European Monetary Union (EMU). In contrast to past examples documenting the lack of profitability of unconditional price momentum in the most recent decade, the current research finds that unconditional price momentum yielded significant positive payoffs. There is evidence of option-like behaviour for strategies based on intermediate past performance. Surprisingly, there is no such evidence for the momentum strategy based on recent past performance.     

Monetary policy transmission mechanisms in Serbia: evidence from the fully-fledged inflation targeting regime

This article examines the effectiveness of monetary transmission mechanisms in the Serbian economy, covering the period from January 2009 (the point at which the formal switch to the fully-fledged inflation targeting regime was made) to December 2013. The results of the recursive VAR models suggest that the exchange rate and credit channels play a major role in the monetary transmission process, whereas this is not true in the case of the interest rate channel. However, the results of the non-recursive VAR models show that the role of the exchange rate has diminished over time. On the other hand, the credit channel has become much more influential. Thus, if one of the overriding objectives of adopting the explicit inflation targeting regime is to enhance the importance of other channels apart from the exchange rate channel, which could make monetary policy more effective in achieving price and financial stability, the switch to the inflation targeting regime is justified.     

The monetary transmission mechanism: evidence and implications for European Monetary Union

We provide some evidence consistent with a heterogeneous credit channel of monetary policy transmission in the European Union. Using the techniques of cointegration and Error Correction Models, we have shown that the external finance premium is one important leading indicator of real economic activity in Germany and Italy. No evidence is found for France and the UK. Therefore, a common monetary policy implemented by the European Central Bank might be transmitted in different ways across the member countries of the monetary union, thus exacerbating existing regional disparities among the member countries.     

Monetary and fiscal policy interactions: Evidence from emerging European economies

This paper examines the interactions between fiscal and monetary policy for some former transition, emerging European economies over the 1995Q1–2010Q4 period by using a Markov regime-switching model. We consider the monetary policy rule proposed by Taylor (1993) and the fiscal policy rule suggested by Davig and Leeper (2007) in accounting for monetary and fiscal policy interactions. Empirical results suggest that monetary and fiscal policy rules exhibit switching properties between active and passive regimes and all countries followed both active and passive monetary policies. As for fiscal policy, the Czech Republic, Estonia, Hungary, and Slovenia seem to have alternated between active and passive fiscal regimes while fiscal policies of Poland and the Slovak Republic can be characterized by a single fiscal regime. Although the policy mix and the interactions between monetary and fiscal policy point a diverse picture in our sample countries, the monetary policy seems to be passive in all countries after 2000. This finding is consistent with the constraints imposed by European Union enlargement on monetary policy.