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.     

Introducing Instruments of Central Bank Accountability in a Monetary Union

With an increasing number of independent central banks, accountability of central banks is also getting more attention. This paper analyses the possibility of introducing instruments of central bank accountability in a monetary union. In our model, monetary policy is influenced by the governments of the member states according to the degree of independence granted to the central bank. Instruments of democratic accountability are introduced which generate different expected losses for a government. The amount of the expected loss will determine the approval of a government to the implementation of a particular mechanism. We show that the agreement between the governments will only be unanimous for the definition of the inflation target of the central bank.

Fiscal Leadership and Coordination in the EMU

We analyze the role of fiscal-monetary policy interactions and fiscal coordination in EMU under the assumption of strategic wage setting in unionized labour markets. We find that production subsidies and real wage distortions are strategic complements. The literature on macroeconomic stabilisation policies and policy games usually neglects this point and reaches overoptimistic conclusions about the desirable effects of accommodating fiscal policies. Central bank preferences also affect the desirability of fiscal coordination in a monetary union. In fact, contrary to Beetsma and Bovenberg (1998), we find that fiscal coordination improves outcomes in the case of a conservative central banker, whereas it leads to worse outcomes with a populist one.

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.     

Endogenous Symmetry of Shocks in a Monetary Union

The monetary union issue, when assessed with the traditional inferences for optimal currency areas, misses an important dimension. Increased specialisation induced by reduced transaction costs, suggested by Krugman's lessons of Massachusetts, is only a part of the story. Even if agglomeration and inter-industry trade may occur as a result of reduced transaction costs, this tendency may be counteracted by the elimination of uncertainty associated with bilateral exchange rate variability within the monetary union.Thus, in contradiction to what is generally assumed on the basis of the reduction in transaction costs only, the European Monetary Union (EMU) is likely to foster intra-industry trade in Europe, leading to more symmetric shocks between member states. The monetary union will endogenously create the conditions of its success. Empirical evidence is provided for EU countries' bilateral trade over the period 1980–1994, using disaggregated trade data.     

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.

Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?

This paper surveys the literature that uses two-country models to analyze monetary and fiscal policy issues faced in interdependent economies. We discuss sources of structural interdependence that researchers typically include in these models. We describe many of the types of policy interactions that researchers have considered and summarize the key results that they have obtained. Finally, we briefly explain the limitations of two-country models and outline directions that this literature might usefully be extended.     

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.      

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.     

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.     

Macroeconomic stabilization through monetary and fiscal policy coordination: Implications for European Monetary Union

In a two-country model, we consider the implications of monetary and fiscal policy coordination for macroeconomic stabilization. We show that the optimal regime is one of monetary and fiscal policy coordination under flexible exchange rates. In the context of the European Community, this suggests that the desire to fix exchange rates may not be costless. In addition, we show that fiscal coordination requires a relatively high degree of flexibility in fiscal policy. This result suggests that limits on the flexibility of fiscal policies, as suggested in the Delors Report, may hinder macroeconomic stabilization.     

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     

Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union

We develop a model of monetary and fiscal policies appropriate for considering U.S.-European policy interactions in an era of near-balanced budgets and European monetary union. We study the determinants of policy trade-offs and incentives for central banks and governments across the Atlantic. Smaller, more open economies face more favorable trade-offs, since openness enhances policy effectiveness via the exchange-rate channel. Changes in Europe's monetary arrangements do not affect U.S. trade-offs, although they alter the trade-offs facing European policy-makers. Fiscal trade-offs depend crucially on the extent to which fiscal policy is distortionary. Changes in taxes and spending move both employment and inflation in the desired direction following a worldwide supply shock when spending is financed with distortionary taxes.     

Modelling Monetary Union in Southern Africa: Welfare Evaluation for the CMA and SADC

This paper proposes a quantitative assessment of the welfare effects arising from the Common Monetary Area (CMA) and an array of broader groupings among Southern African Development Community (SADC) countries. Model simulations suggest that (i) participating in the CMA benefits all members; (ii) joining the CMA individually is beneficial for all SADC members except Angola, Mauritius and Tanzania; (iii) creating a symmetric CMA‐wide monetary union with a regional central bank carries some costs in terms of foregone anti‐inflationary credibility; and (iv) SADC‐wide symmetric monetary union continues to be beneficial for all except Mauritius, although the gains for existing CMA members are likely to be limited.     

Mix of Fiscal and Monetary Policy Rules and Inflation Dynamics in China

The present paper examines the role of the mix of fiscal and monetary policy rules in determining inflation dynamics using fiscal and monetary policy reaction functions and Markov‐switching vector autoregression methods based on quarterly data in the period 1992–2007. Our results show that fiscal and monetary policies in China can be adequately described using some simple rules, and that significant regime shifts took place around 1998. Fiscal policy tended to be active and countercyclical in the pre‐1998 period, then switched to be passive and more countercyclical, whereas monetary policy was characterized as passive and procyclical in the pre‐1998 period, and switched to be active and countercyclical afterwards. The mix of fiscal and monetary policy rules can explain inflation dynamics better than the monetary policy rule alone. Therefore, price stability requires not only appropriate monetary policy but also appropriate fiscal policy.     

Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence

This paper examines generalised purchasing power parity (G-PPP) and business cycle synchronisation in the East Africa Community with the aim of assessing the prospects for a monetary union. The univariate fractional integration analysis shows that the individual series exhibit unit roots and are highly persistent. The fractional bivariate cointegration tests suggest that there exist bivariate fractional cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and the Ugandan shilling. The Fractionally Cointegrated Vector AutoRegressive (FCVAR) results imply the existence of a single cointegrating relationship between the exchange rates of the EAC countries. On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree of business cycle synchronisation between these economies. On both grounds, one can argue that a monetary union should be feasible.     

促进宁波市科技投入的实证分析与财政政策工具研究

从实证分析的角度出发,分析了宁波市科技投入的基本情况与存在的一些问题,并通过对财政政策工具的分析,提出了促进宁波科技投入的相应对策与建议.