Wage-Setting and Inflation Targets in EMU

Although the operation of national coordinated wage-bargainingsystems in EMU has produced low inflation rates, EMU-wide inflationhas been above the ECB target rate for the last 3 years. Bycontrast, under the ERM, inflation rates declined steadily after1992 to below 2 per cent in both the last 2 years of the regime.It is argued that this was the consequence of two low-inflationincentives under ERM: (i) the Maastricht inflation conditionfor EMU entry; and (ii) the combination of the Bundesbank threatto raise interest rates if German wage and price inflation roseabove acceptable limits, linked to the need for other ERM membersto follow low German inflation to stay within the exchange-ratebands. These incentives no longer operate under EMU, where individualeconomies do not have an incentive to contribute to low EMU-wideinflation. We suggest that inflation coordination between thelarge EMU member states might contribute to a solution whilepermitting the continuation of real exchange-rate adjustmentsof smaller economies.     

Sustainability and comovement of government debt in EMU Countries: A panel data analysis

We investigate the sustainability of fiscal policy in a set of 19 European Monetary Union (EMU) countries over the period 1970–2016. Panel unit root tests in the presence of cross-section dependence show that the government debt series is stationary, indicating that the solvency condition would be satisfied for these countries. This confirms the effectiveness of the austerity measures implemented by these member states. Moreover, an unobserved common factor drives the comovement of government debt in the Eurozone.     

Designing and Choosing Macroeconomic Frameworks: The Position of the UK after Four Years of the Euro

Fiscal and monetary policy frameworks have become increasinglypopular as disenchantment with active stabilization policy hasincreased. Frameworks need to be designed to achieve targetsefficiently and stabilize the volatility of the economy. Thecurrent fiscal and monetary frameworks in the UK and the euroarea can be improved. The UK economy went through major regimechanges in the 1990s and as a result it has experienced morestable outcomes in the last few years. Whether the UK remainsoutside EMU or becomes a member, inflation, real interest rates,and the level of government borrowing would be similar. However,further gains to stability and hence to potential productivityare available if the UK becomes a member of EMU. The UK andthe euro-area countries currently have economic cycles thatare coherent, experiencing very similar cyclical positions.Although interest rates differ, it is clear that these smalldifferences in rates have little impact on the cyclical positionof these economies. In addition we find no evidence that outputin the UK is excessively sensitive to changes in interest rates,at least when compared to the other large European countries.     

Asymmetries in housing and financial market institutions and EMU

Despite convergence pressures, differences in housing and financialmarket institutions across the 15 member states of the EuropeanUnion are still enormous. This paper argues that they have profoundeffects on the responsiveness of output and inflation in thedifferent countries to changes in short-term interest rates,as well as to asset-market shocks of external origin. The economicreasoning behind this claim is set out and the institutionaldifferences are described. The paper assesses the sometimesconflicting empirical evidence on this issue. Barriers to convergenceand implications for labour-market flexibility are discussed.The UK, Ireland, Finland and Sweden tend to cluster at one extremeof the relevant institutional characteristics. The paper concludeswith a set of proposals for institutional reforms which wouldsignificantly reduce the tensions within EMU and the potentialfor instability in these economies entailed by EMU membership.     

Does the dispersion of unit labor cost dynamics in the EMU imply long-run divergence?

Using unit labor cost (ULC) data from Euro area countries as well as US States and German Länder we investigate inflation convergence using different approaches, namely panel unit root tests, cointegration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU. However, country-specific deviations from the rest of the currency union are much more pronounced and much more persistent in Europe than in the US or Germany. This holds before and after the introduction of the common currency. Hence, asymmetric shocks in the future might take a long time to dissipate.     

Reconsidering the International Comovement of Inflation

In this paper we reconsider the degree of international comovement of inflation rates. We use a dynamic hierarchical factor model that is able to decompose Consumer Price Index (CPI) inflation in a panel of countries into (i) a factor common to all inflation series and all countries, (ii) a factor specific to a given sub-section of the CPI, (iii) a country group-factor and (iv) a country-specific component. With its pyramidal structure, the model allows for the possibility that the global factor affects the country-group factor and other subordinated factors but not vice versa. Using quarterly data for industrialized and emerging economies from 1996 to 2011 we find that about two thirds of overall inflation volatility is due to country-specific determinants. For CPI inflation net of food and energy, the global factor and the CPI basket-specific factor account for less than 20 % of inflation variation. Only energy price inflation in industrial economies is dominated by common factors.     

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.     

Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data

This paper uses the European Commission’s Consumer Survey to assess whether inflation expectations have converged and whether inflation uncertainty has diminished following the introduction of the euro in Europe. Consumers’ responses to the survey suggest that inflation expectations depend more on past national inflation rates than on the ECB’s anchor for price stability. Inflation expectations do not converge significantly faster than actual inflation rates. Regarding inflation uncertainty, the data indicate a relationship with country size following the introduction of the euro. This suggests that within EMU, inflation uncertainty may increase in countries that have a smaller influence on ECB policy. JEL no.  D84, E31, E58     

The Convergence of Price–cost Margins

This paper provides estimates of sectoral price–cost margin (PCM) trends in thirteen OECD countries over the last three decades, once controlled for inflation and cycle effects. It concludes with the absence of a decrease in average PCM. More strikingly, it establishes a clear pattern of PCM convergence both across countries and sectors. This convergence means that high margins have shrunk and low margins grown. Better capital market efficiency might be a driving force in the PCM convergence. These results point to a need to search for factors countervailing the pro-competitive effect on markups. The views expressed in this paper are those of the author and do not necessarily represent those of the OECD or its member countries.     

Convergence of inflation: A necessary prerequisite for EMU?

This article assesses the rationale for inflation convergence as a major criterion for the passage to the final stage of Economic and Monetary Union (EMU). A simple two-country model is developed to examine the effects of the change in regime under different hypotheses concerning agents' expectations. The results suggest that, in the absence of convergence, the move to EMU is likely to produce spillover effects from the high-inflation to the low-inflation country. The latter, therefore, has a strong incentive to request strict convergence criteria for inflation before moving to EMU.     

Rotating Slumps in a Monetary Union

In the decade since its creation in 1999, the European Economic and Monetary Union (EMU) has experienced surprisingly large and persistent inflation differentials across member states causing substantial shifts in relative price levels. At the same time, member countries exhibited distinct non-synchronized output fluctuations, giving rise to a pattern of ‘rotating slumps’ (a term coined by Olivier Blanchard). This paper presents a stylized theoretical model of a monetary union which demonstrates how inflation differentials and relative output movements interact dynamically. A number of implications are derived from the model. In particular, national fiscal policies are shown to have an important role in containing internal macroeconomic disparities in a monetary union. An optimal fiscal policy rule is derived from the model for that purpose.     

Zwevende wisselkoersen

Summary It is shown that the most important advantages of fluctuating exchange rates (full employment; protection against the import of inflation; optimal international specialisation) as well as the disadvantages of this system (instability of the economy; inflationary pressure; hampering international economic relations) only have a limited validity. On the other hand the advantages of fixed exchange rates (promoting international trade; impeding internal inflation) and its disadvantages (larger unemployment; import of inflation) have no more general validity. A crawling peg does not give a solution for fundamental disequilibria and a widening of the band implies a more difficult task for the authorities. Fluctuating exchange rates always leave open the possibility of ‘dirty floating’. An adjustable peg with rules for swift adjustment for deficitand surplus countries might well give the best solution.     

International Convergence of Capital Market Interest Rates

This article investigates the extent of capital market interest rate convergence among six EU countries on the one hand, and a group of four countries with floating exchange rates - US, Germany, Japan, and Switzerland - on the other. We conclude that interest rate changes within the EU have been and still are converging gradually since 1980. Within the group of free-float currencies, the increase in convergence occurred abruptly around 1980, after which the extent of convergence remained roughly constant. Moreover, the presumed higher influence of US long-term interest rates on the level of German interest rates could not be detected.     

对EMU启动前后欧盟国家贸易状况的实证研究

EMU的启动对EMU成员国、欧盟其他国家甚至全世界都有着很大的影响。但是在EMU启动至今已十年,它是否真的发挥了它应有的作用?为了研究这个问题本文选取了对EMU成员国贸易情况进行实证研究的角度来透视EMU启动所带来的影响。本文选取了1992～2007年的面板数据,并通过扩展引力模型实证检验了EMU对其成员国贸易的影响情况。本文研究结果表明:从整体上而言,EMU对其成员国的贸易影响是正面的,即:EMU的实施增加了EMU成员国与其它国家的双边贸易,但对于不同国家EMU的影响具有差异性。     

From the Gold Standard to a Bipolar Monetary System

This paper argues that the international monetary system will evolve into a bipolar structure consisting of a dollar area and a euro area, each of which attracting other countries to their gravitational centers. A deepening and widening of NAFTA and the EU will enlarge the sphere of influence of both currencies; trade wars will restrict them. The yen is a big question mark. The deep and still unresolved financial crisis in Japan works against the enlargement of the yen; deregulation of its financial markets, with the attendant decline in transaction costs, goes in the opposite direction. Our conclusion is that the yen area will be much smaller than the dollar and the euro area and, consequently, the two large blocs will shape the international monetary system of the 21st century in a critical way. We also discuss feasible scenarios of interaction between currency blocs. A large EMU works in favor of cooperation because fewer players imply lower decision-making costs in reaching a cooperative solution. The relative closeness of the EMU and the United States, on the other hand, works against cooperation and in favor of benign neglect. Exchange-rate agreements are fragile unless supported by strong commitment to economic policy cooperation, and such a commitment may well be premature. The article advocates that the United States and EMU target common inflation rates, an idea that Keynes proposed back in 1923.     

Foreign Capital Flows,Uncertainties of Exchange Rates and Central Bank Independence: Implications for Emerging Economies

Utilizing time series data for a panel of 22 emerging countries and applying Granger causality tests, this paper extends the relationship between central bank independence (CBI) and uncertainties of inflation by including the phenomena of exchange rates and foreign capital flows. There are two specific objectives of this investigation. The first objective is to see whether uncertainty of inflation induces volatility of exchange rates, and vice versa, under differing degrees of CBI. The second objective is to explore whether the dynamics of the former relationship influence foreign capital flows in turn and, if so, whether the extent of CBI plays any role in shaping that influence. The period of study spans the years 1968 through 2013. Conditional variances for inflation and exchange rates define proxies for uncertainties of inflation and exchange rates in the empirical analysis. Additionally, annual inflows of foreign direct investment (FDI) provide measures for foreign capital flows in the analysis. Results of causality tests for high and low CBI country subgroups show interesting differences. For the high CBI countries, uncertainty of inflation and uncertainty of exchange rates do not share any causal relationship whatsoever between them. However, a weak link runs from FDI to uncertainties of inflation in the long run. This may be indicative of the disciplined monetary policy and tamed inflation in these countries. Contrastingly, for the low CBI countries, there is strong evidence of causal links running from uncertainties of inflation to uncertainties of exchange rates on the one hand and to FDI flows on the other. In addition, there is indication of a bi-directional causal link between FDI flows and exchange rates for these countries.     

Government Debt Denomination Policies Before and After the EMU Advent

Through a cost-minimizing approach, this paper derives joint indicators to assess the efficiency of the mix of sovereign debt currencies between the countries belonging to the European Monetary Union (EMU). This theoretical insight enables us to explain why and how the introduction of the euro and the adoption of a common monetary policy may have led to significant changes in debt structure among EMU members, notably in favor of further euro-denominated debt. The interplay of intrinsic and strategic variables yields stylized facts that are consistent with country-specific empirical evidence. Following the sovereign debt crisis, we further emphasize the value-added of a coordinated debt issuance policy among EMU countries.     

Is the European union a natural currency area, or is it held together by policy makers?

Is the European Union a Natural Currency Area, or Is It Held Together by Policymakers? — In 1999, EMU started with 11 members, but with considerable uncertainty about the depth of the convergence between them. The optimal currency area literature stresses the need for shocks which are symmetric and of similar size across countries. Our results show that symmetries in the core are only marginally stronger than those in the periphery; and that these symmetries have been increasingly maintained by policy interventions. Consequently, Europe may evolve into an optimal currency area; but the symmetries will be policy-induced rather than a market phenomenon. This suggests a fragility which could be reflected in the value of the new currency.     

Chinese Stylized Sterilization： The Cost-sharing Mechanism and Financial Repression

This paper attempts to explain why sterilized intervention was so successful and sustainable in China during the first decade of the 21st century.We argue that the Chinese Government established a sterilization cost-sharing mechanism among the People’s Bank of China, commercial banks and the household sector.On the one hand,Chinese commercial banks have to assume some of the sterilization costs by purchasing low yield central bank bills and maintaining high levels of required reserves.On the other hand,Chinese households assume some of the sterilization costs by bearing negative real deposit interest rates.The costsharing mechanism under financial repression prevents a huge quasi-fiscal loss by the People’s Bank of China as well as high inflation.However,Chinese households have become victims of this financial repression.Faced with the pressure of changing the growth model from investment-driven to domestic consumption-driven,the interest rate will have to be liberalized eventually,which will,in turn,make sterilized intervention unsustainable.