Money demand and monetary policy in Europe

Money Demand and Monetary Policy in Europe.—The European Central Bank will soon have to decide on her monetary strategy. This paper discusses properties of money demand functions and implications for monetary policy in a monetary targeting regime. Special attention is paid to different concepts of stability of money demand, to the length and variability of adjustment lags, and to the controllability of the money stock. At the European level, stable money demand functions are identified for M1 and M3. However, M3 appears to be less controllable than M1. Long and variable adjustment lags in the demand for M3 weaken the case for broad money as a monetary target. JEL no. E41, E52     

Convergence - the Maastricht approach to economic and monetary union (EMU) in Europe

This article reviews the concept of convergence in the Maastricht Treaty and notes that, while in certain areas the convergence objectives are quite ambitious, in other areas the objectives for the transition period are surprisingly limited. By end-1992, much progress had already been achieved on convergence in a majority of EC countries (and countries applying for membership). Thus, despite the wave of pessimism that followed the recent exchange market crisis, it is still quite possible that a majority of EC members could qualify for monetary union by 1997. However, this would require further significant adjustment in many cases in the fiscal area. Based on the Multimod Model used at the Fund, the deflationary effect of this fiscal consolidation would be small and short lived.     

Some problems of monetary dependency in West African States of French colonial legacy

Conclusion Some advantages of the franc zone and the Operation account to the Paris exchange market may have existed and still exist for the UMOA member states. These financial arrangements may have provided relative monetary stability to the Monetary Union of West African states. But they still favor French Treasury by bringing foreign currency to the Paris Exchange market.     

Reflections on international economic and monetary problems

Summary The impact of the oil price increases on international monetary reform, including the role of gold, and on the adjustment process is discussed. Events have enhanced the importance of the rules basic to an orderly monetary and trading system, viz. fixed parities, convertibility and timely adjustment. The European snake arrangement could provide a focal point. A stronger dollar has improved the outlook for a balanced albeit distant reform. In this connection the obligations of developed and oil-producing countries are touched upon. Present real and monetary adjustment problems are regarded as soluble. Rampant inflation, however, jeopardizes economic and social stability.Speech delivered to the Zürcher Volkswirtschaftliche Gesellschaft on Wednesday, 13th March 1974, in Zürich.Dr J. Zijlstra is President of De Nederlandsche Bank N.V. and of the Bank for International Settlements in Basle.     

The euro and the monetary union

The Eurosystem established a single monetary policy and has the three guiding principles of independence, transparency, and decentralization. These three principles helped to successfully formulate and implement the euro on 1 January 2002. Major criticisms against establishment of the euro failed to come true and, in fact, the euro has quickly become a major currency in the world. Challenges facing continued success of the euro include structural reforms, financial stability, and the accession of new members to the EU and EMU. TheRobert A. Mundell Distinguished Address presented at the Fifty-Third International Atlantic Economic Conference, March 13–17, 2002, Paris, France.     

Fiscal discipline in the European monetary union

This paper explores the question of how national fiscal policies could be conducted within the European Monetary Union. The discussion touches upon this issue in relation to the theory of optimum currency areas; presents the debt sustainability issue in the context of a monetary union; examines briefly the determinants of debt dynamics; and interprets the restraints imposed on national fiscal policies by the Maastricht Treaty. The tentative conclusion is that the creation of the EMU will be associated with smaller size national government sectors.Invited Address at the Thirty-Seventh International Atlantic Economic Conference, Athens, Greece, March 8–15, 1994. Financial support by the Economic Research Center of the Athens University of Economics and Business is gratefully acknowledged.     

Assessing the costs of European monetary union

Much has been made of the importance of asymmetric shocks in arguing against European Monetary Union (EMU). But such shocks are entirely consistent with better monetary policy under EMU. A single money represents the perfect answer to asymmetric shocks coming from currency substitution. In addition, many asymmetric shocks cannot properly be handled through monetary policy; others will not be so because of information problems; still others because of policy mistakes. Some strategic factors also favor EMU if shocks are symmetric. Finally, doubts about the effectiveness of monetary policy in Europe should be kept in mind. On these numerous grounds, little weight can be assigned to criticisms of EMU based on mere asymmetry in the shocks. Distinguished Address presented at the Forty-First International Atlantic Economic Conference, Paris, France, March 12–19, 1996.     

Money demand and stabilisation in Zimbabwe

During the 1980s the potential instability of Zimbabwe's unsustainablyhigh budget deficit was reduced by the smooth transfer of resourcesfrom the private to the public sector via the domestic financialsystem, which affected private demand for financial assets.Import, exchange and price controls operated to suppress private-sectordemand. This led to the build-up of private savings, which wason-lent to the government via liquid asset requirements andthe crowding out of domestic deposits in the nonbank privatesector's portfolio by government securities. This article usesJohansen's procedure for analysing cointegration to model thedemand for real money balances in Zimbabwe, in order to determinethe extent to which these constraints on the domestic assetmarket suppressed the demand for money in Zimbabwe.     

Money demand in China and time-varying cointegration

Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.     

The European exchange rate mechanism and the European monetary union

Summary This article addresses two central questions related to the prospects of the Economic and Monetary Union (EMU) in Europe: first, is the current exchange rate mechanism viable in the transition stage to EMU or in the period to come if the EMU should be postponed? Second, is a monetary union necessary in an economically fully integrated European Union or would the current or an alternative exchange rate mechanism suffice an integrating Europe? The article reviews the arguments for and against monetary union, the history of European monetary integration, the theoretical and empirical insights into the functioning of targets zones, and the likely developments and prospects for the EMU.The author wishes to thank Martin M.G. Fase and Simon K. Kuipers for their most helpful comments on a previous version of this article.     

Integrability and aggregation in the theory of demand

Harold Hotelling believed that integrability was a necessary characteristic of both individual and market demand equations, and he demonstrated that it would hold if consumers did not have a budget constraint. If there was a budget constraint, he contended, the usual integrability condition would be replaced by a condition which assures that an integrating factor can be introduced. This paper shows that this condition can be satisfied only if the consumer's income effect is the same numerically for all goods. Aggregation by summation of individual demands is considered, and it is shown that this form of aggregation is valid if there is a budget constraint only when income effects are the same for all individuals.     

Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?

Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetized Debt? —The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank sets the nominal interest rate and responds to rising government debt/GDP ratios by monetization. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the central bank removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.     

European monetary union and asymmetric shocks in a new Keynesian model

This paper attempts to quantify the costs imposed by asymmetricshocks under European Monetary Union compared to free floating.A simple two-country model is examined where policy is set inan optimal, time consistent manner. Nominal and real rigiditiesare present in both economies, but prices are set in a forwardlooking manner and expectations are rational. Results suggestthat the costs of asymmetric shocks under EMU may be significantlyhigher than under free floating, particularly if fiscal policyis not used for demand management.     

The economics of convergence: Towards monetary union in Europe

The Economics of Convergence: Towards Monetary Union in Europe. —In this paper, the literature on monetary integration has been surveyed in order to discover the economic rationale of the Maastricht convergence requirements. The traditional theory of optimum currency areas is silent on the need for Maastricht-type convergence requirements. Similarly, the “new” view of monetary integration using credibility concepts cannot easily be used to justify these convergence requirements. It is also argued that the dynamics of the convergence requirements will almost certainly lead to a “Great Divide” of the European Union. The paper concludes that less emphasis should be put on prior convergence conditions and more on strengthening the functioning of the future monetary institutions in the Union.     

Analysis of a monetary union enlargement in the framework of linear-quadratic differential games

This paper studies the effects of a monetary union enlargement using the techniques and outcomes from an extensive research project on macroeconomic policy coordination in the EMU. Our approach is characterized by two main pillars: (i) linear-quadratic differential games to capture externalities, spillovers and strategic behaviour of (fiscal and monetary) players; and (ii) endogenous coalition formation concepts which enable us to study a creation and stability of different cooperation arrangements. In this paper we focus on the first pillar and construct a multi-player linear-quadratic continuous-time model of 5 countries and 4 central banks to evaluate effects of accession of a new member to an existing MU. Our findings stress the importance of an asymmetric shock confirming basic results of the OCA theory. It comes out that in our setting it is never profitable to enlarge the monetary union when there is a risk of an asymmetric shock. What is more, the potential losses from accession are so high that it can be barely possible to design a transfer system to compensate for a worse situation of some countries.