The Euro's place in the world monetary system

The European Union is striding ahead on schedule towards European monetary union (EMU). Eleven member states will introduce the euro for book-keeping purposes on 1.1.1999, assigning responsibility for monetary policy to the European System of Central Banks. On 1.1.2002, the euro will also be in circulation as notes and coins, and the participating countries will abandon their national currencies by 30.6.2002 at the latest. But what part will the euro play in the world monetary system? And what conclusions do we need to draw?     

Driven by the markets? ECB sovereign bond purchases and the securities markets programme

At the height of the European sovereign debt crisis, the European Central Bank decided to purchase distressed European government bonds. Even worse, and more importantly, the ECB is providing direct support of several hundred billions of euros to troubled banks via its normal monetary policy operations by granting them the opportunity to refinance at an interest rate of 1%. This article argues that these purchases will result in common monetary policy being dominated by national fiscal policies. The most worrisome aspect is that the euro area appears to have stumbled into unconventional monetary policies that, once started, will be difficult to exit. In the euro area, properly functioning financial markets are at risk.     

On the Link Between Exchange‐rate Regimes,Capital Controls and Monetary Policy Autonomy in Small European Countries, 1979–2000

We investigate international monetary‐policy transmission under different exchange‐rate and capital‐account regimes in eleven small, open economies during the 1980s and 1990s. We find no systematic link between ex‐post monetary‐policy autonomy and exchange‐rate regimes. Capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks, though not strict autonomy. The results are consistent both with short‐term autonomy for small countries even under fixed exchange rates and an open capital account, and with long‐term dependence under flexible exchange rates and an independent stability target. Results also indicate that euro‐area market interest rates are significantly more responsive to the development of the corresponding US rate than were the previous national rates.     

Problems of measuring money supply in the Euro Area

With just a few weeks left to go before responsibility for monetary policy is transferred from the EMU member countries to the European Central Bank, there is still no standardised concept for measuring a euro area money supply which could serve as a statistical basis for a money-supply oriented monetary policy strategy. Which problems remain to be solved?     

EMU and Trade Revisited: Long‐Run Evidence Using Gravity Equations

In this paper, we present evidence of the long‐run effect of the euro on trade for the twelve initial EMU countries for the period 1967–2008 from a double perspective. First, we pool all the bilateral combinations of trade flows among the EMU countries in a panel cointegration gravity specification. Second, we estimate a gravity equation for each of the EMU members vis‐à‐vis the other eleven partners. We apply panel cointegration techniques based on factor models that account for cross‐dependence and structural breaks. Whereas the joint gravity equation provides evidence on the aggregate effect of the euro on intra‐European trade, by isolating the individual countries, we assess which of the member countries have obtained a larger benefit from the euro. The results show that the euro has had a positive though small effect on trade. Belgium and Luxembourg, France and Italy are the countries more benefited from the introduction of the euro. The effects for exports to third countries are in general more moderate, and, with the exception of Greece, there is no evidence of diversion effects.     

The Importance of Global Shocks for National Policymakers – Rising Challenges for Sustainable Monetary Policies

This paper analyses the importance of global shocks for the global economic developments and national policymakers from a novel perspective. On the one hand, we examine whether global factors convey additional information about monetary conditions not summarised by national aggregates. More specifically, we keep an eye on the question whether domestic monetary policies have become less effective in the wake of financial globalisation. We adopt a FAVAR framework to derive structural shocks on a worldwide level and their impact on other global and also national variables. We estimate our macromodel using quarterly data from Q1 1984 to Q4 2012 for the G7 countries plus the euro area. According to our results, global liquidity shocks significantly influence the global economy at the commodity price level. However, some other common shocks originating from house prices and GDP play a role at the global level as well.     

Why price‐level dispersion went up in Europe after the financial crisis

Persistent price differences across euro area countries are an indication of incomplete economic integration. We analyse long‐ and short‐run developments of price‐level dispersion in the euro area and compare the results with price dispersion across US cities. We find that monetary and economic integration in Europe has been successful in establishing a major downward trend in price‐level differences across countries since 1960. After the Global Financial Crisis and the European Sovereign Debt Crisis, diverging economic conditions across euro area countries led to higher income dispersion, which contributed to a widening of price‐level differences again.     

Policy Rules in the Economic and Monetary Union

This paper studies whether a monetary union can be managed solely by a rule-based approach. The Five Presidents’ Report of the European Union rejects this idea. It suggests a centralisation of powers. We analyse the philosophy of policy rules from the vantage point of the German economic school of thought. There is evidence that a monetary union consisting of sovereign states is well organised by rules, together with the principle of subsidiarity. The root cause of the euro crisis is rather the weak enforcement of rules, compounded by structural problems. Therefore, we suggest a genuine rule-based paradigm for a stable future of the Economic and Monetary Union.     

Is the US Dollar a Suitable Anchor for the Newly Proposed GCC Currency?

Responses of inflation and non‐oil output growth from the Gulf Cooperation Council (GCC) countries to monetary policy shocks from the United States (US) were estimated to determine whether there is evidence to support the US dollar as the anchor for the proposed unified currency. A structural vector autoregression identified with short‐run restrictions was employed for each country with Fed funds rate as the US monetary policy instrument, non‐oil output growth and inflation. The main results suggest that for inflation, the GCC countries show synchronised responses to monetary policy shocks from the US which are similar to inflation in the US, and for non‐oil output growth, there is no clear indication that US monetary policy can be as effective for the GCC countries as it is domestically. Consequently, importing US monetary policy via a dollar peg may guarantee only stable inflation for the GCC countries – not necessarily stable non‐oil output growth. If the non‐oil output response is made conscientiously – and there are concerns over the dollar’s ability to perform its role as a store of value – a basket peg with both the US dollar and the euro may be a sound alternative as confirmed by the variance decomposition analysis of our augmented SVAR with a proxy for the European short‐term interest rate.     

MONETARY AND FISCAL INTERACTIONS: SHORT‐RUN AND LONG‐RUN IMPLICATIONS

We model policy interactions in a growing economy. Unemployment can persist and matters for the real wage; conflicting claims underpin inflation outcomes; and aggregate demand determines capacity utilization and unemployment. Monetary policy is characterized by a Taylor rule. Fiscal policy is characterized by a marginal tendency to run deficits or surpluses. We address three questions: can monetary policy ensure macroeconomic stability in the absence of coordinated fiscal policy, can fiscal policy ensure macroeconomic stability when the monetary authority pegs the interest rate, and can policy authorities trade‐off some sustained inflation for a long‐run improvement in unemployment rates?     

The Fiscal Framework in a Currency Union: Lessons from a Comparison between the Euro Area and the Eastern Caribbean Currency Union

This paper draws out lessons from the euro area (EA) that are transferable to the Eastern Caribbean Currency Union (ECCU) and other Caribbean economies with fixed exchange rates. Based on observations from both the EA and the ECCU, we present a new policy framework which is capable of imposing fiscal discipline, with the aim of avoiding the risk of unsustainable fiscal policies reappearing and of preventing monetary policy from being undermined by undisciplined national governments. In the ECCU case, we find that fiscal deficits are more a result of financial and trade imbalances than fiscal indiscipline per se. Consequently, constraints on overall debt, public and private, rather than direct limits on endogenous public deficits, appear to be the appropriate response.     

Fiscal and Monetary Policy Rules in an Unstable Economy

This paper examines the implications of different monetary and fiscal policy rules in an economy characterized by Harrodian instability. We show that (1) a monetary rule along Taylor lines can be stabilizing for low debt ratios but becomes de‐stabilizing if the debt ratio exceeds a certain threshold, (2) a ‘Keynesian’ fiscal policy rule can stabilize the economy at full employment, (3) a fiscal ‘austerity’ rule that links fiscal parameters to deviations from a target debt ratio fails to adjust the ‘warranted’ to the ‘natural’ growth rate and destabilizes the warranted path and (4) instability may arise from a combination of fiscal and monetary policy rules which separately would stabilize the system.     

The trilemma of a monetary union: Another impossible trinity

A monetary union among autonomous countries cannot simultaneously maintain an independent monetary policy, national fiscal sovereignty and a no-bailout clause. These three features make up an impossible trinity, and attempts to preserve all three concurrently will ultimately end in failure. In order to save EMU, one of these three must be abandoned.     

Nationale Geldsch?pfung zersetzt den Euroraum

The Eurosystem has been operating in crisis mode for more than four years now. Massive quantitative and qualitative easing in its monetary policy stance are the visible marks of its response to the turbulence in the financial sector. This policy aims primarily at maintaining financial stability in the euro area by providing vast liquidity support to commercial banks that are operating in nationally segmented banking systems. The sovereign debt crises in some member countries further exacerbate the segmentation problem along country borders. As a side effect, cross-border capital flows are substituted by money market operations by the national central banks. The latter are engaging more and more often in substantial balance-of-payments financing, and financial risks are shifted from investors to European taxpayers via the Eurosystem. Symptomatically, this shows up in exploding TARGET2 positions in the national central banks’ balance sheets. The longer this process continues, the stronger the centrifugal forces become that ultimately might burst the single currency. A solution requires a euro area-wide regulatory approach for the financial sector. Next to a uniform scheme for banking regulation, supervision and resolution, we recommend the comprehensive introduction of contingent convertible bonds (CoCos) as a major refinancing source for the banking industry. As this proposal cannot be introduced overnight, national and European banking resolution funds are necessary in the short run. The latter do not rescue banks, but they kick in as soon as a bank’s equity is depleted in order to wind down failing banks in a systemically prudent way.     

One fits all in the EMU? One monetary policy for eleven countries

Euro-skeptics continue to argue that the discrepancies between national business cycles are too wide, and that a common European monetary policy cannot work in the long run. The laboriously accomplished monetary stability will therefore not be able to last, high rates of inflation and a “soft” euro will, in the long run, be the inevitable consequences. The empirical evidence given in the following article supports a different view: not only has there been a strong correlation of business cycles in Euroland over the past decade, but there are also a multitude of forces that are working towards further convergence.     

Monetary and fiscal policy transmission in the Euro-area: evidence from a structural VAR analysis

This paper studies the transmission of monetary and fiscal policy in the Euro-area. To do so, structural VAR models are estimated. First, the EMU countries are considered as an aggregate entity and the estimation results are compared with those for the US and Japan. Attention is also paid to interaction of macroeconomic policies and the effects of shocks in financial markets. As a next step, SVARs are estimated for the individual EMU countries to analyze cross-country differences. It turns out that, compared to the EMU aggregate, individual EU countries react rather differently to monetary and fiscal policy shocks.     

Currency substitution,money growth rules,and the interdependence of monetary policy

This paper examines the interdependence of national monetary policies under flexible exchange rates when national currencies are seen as substitutes for one another. It is shown that the efficacy of a constant monetary growth rule as a means of controlling a country's price level depends on the policies of foreign central banks. These results are in contrast to those found under flexible exchange rates and no currency substitution. The role of monetary growth rules in a world of currency substitution is discussed.     

Monetary Dynamics of Inflation in China

This paper investigates both the short‐run and the long‐run relationships between monetary growth and inflation in China between 1980 and 2010. We construct multivariate dynamic models based on Friedman’s quantity theory of money (but permitting money to be endogenous) and Meltzer’s monetarist model. The empirical results provide robust evidence that there is a bilateral causal relationship between monetary growth and inflation as well as between monetary growth and output growth. An indirect and implicit causal relationship between monetary growth and inflation is found through the asset inflation channel. There are also long‐run equilibrium relationships between money stock, price index and other relevant variables. The present paper further provides a historical exploration of the mechanism of the monetary dynamics of inflation in China over the underlying period. We conclude that the monetary growth rule is likely to be the most promising policy orientation for China to manage its inflation.     

A POST‐KEYNESIAN AMENDMENT TO THE NEW CONSENSUS ON MONETARY POLICY

A common view is now pervasive in policy research at universities and central banks, which one could call the New Keynesian consensus, based on an endogenous money supply. This new consensus reproduces received wisdom: in the long run, expansionary fiscal policy leads to higher inflation rates and real interest rates, while more restrictive monetary policy only leads to lower inflation rates. The paper provides a simple four‐quadrant apparatus to represent the above, and it shows that simple modifications to the new consensus model are enough to radically modify received doctrine as to the likely effects of fiscal and monetary policies.     

宏观政策的协调机制与欧洲债务危机

通过政策调整损失函数的理论模型分析,认为负的需求冲击是构成欧洲债务危机的前提,而缺乏货币政策协调的持续性扩张财政政策是欧洲债务危机的本质原因。对2000Q1—2010Q1的"PIIGS"的季度数据进行实证分析后,发现5国独立财政政策和欧元区共同货币政策的协调机制是存在冲突的。希腊长期均衡和短期调整均存在主权债务危机风险,因而成为首个爆发危机的国家。西班牙、意大利的短期调整虽暂时缓解了主权债务危机出现的可能,但不能解决发生危机的根本问题。而爱尔兰、葡萄牙只是短期内实施了过度的积极财政计划而造成了主权债务危机假象。