Rotating Slumps in a Monetary Union |
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Authors: | Oliver Landmann |
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Institution: | (1) Institut f?r allgemeine Wirtschaftsforschung, Universit?t Freiburg, Platz der Alten Synagoge, 79085 Freiburg, Germany |
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Abstract: | 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. |
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