MONETARY POLICY, FISCAL POLICIES AND LABOUR MARKETS: MACROECONOMIC POLICYMAKING IN THE EMU; ED. BY R. BEETSMA

A team of experts on the European economy focuses on the three major issues of fiscal policy, monetary policy and labor markets in this collection. They provide a survey of recent research on each topic as well as related state-of-the-art contributions. The early years of European Monetary Union have not been easy for the European economy. Economists are divided in their assessment of the effectiveness of key institutions, such as the European Central Bank, and their ability to provide macroeconomic stability and foster the reforms necessary to stimulate economic growth. Cover......Page 1 Half-title......Page 3 Title......Page 5 Copyright......Page 6 Contents......Page 7 Figures......Page 9 Tables......Page 12 Contributors......Page 13 Acknowledgements......Page 18 Editors’ introduction......Page 19 Part I: Monetary policy......Page 20 Part II: Fiscal policies......Page 21 Part III: Labour markets......Page 22 Part I Monetary policy......Page 25 1 Institutional structure......Page 27 2 Policy objectives and policy strategy......Page 29 3 Communication and transparency......Page 33 5 Future challenges......Page 34 REFERENCES......Page 36 1 Introduction......Page 38 3 Objective and strategies of the ECB: the data......Page 39 4 Optimal price indexes for monetary policy......Page 42 5.1 Issues for discussion......Page 45 6 Core inflation in the euro area......Page 46 6.1 Issues for discussion......Page 47 REFERENCES......Page 48 1 Introduction......Page 49 2 The model......Page 51 3 Log-linear approximations to the structural equilibrium conditions......Page 57 4 Welfare criterion......Page 59 5 Terms-of-trade shocks and monetary policy......Page 61 5.1 Welfare comparisons......Page 62 5.2 Dynamic adjustments......Page 64 6 Conclusions: should the ECB abandon HICP targeting?......Page 67 Appendix......Page 68 REFERENCES......Page 75 1 Introduction......Page 77 2 Long-run analysis of a small-scale macro system......Page 79 2.1 Methodology......Page 85 2.2 Long-run results......Page 86 3.1 Econometric methodology......Page 88 3.2 Results......Page 90 4.1 The nature of the cyclical inflation component......Page 97 4.3 Forecasting inflation from a structural dynamic model......Page 99 5 Conclusions......Page 102 REFERENCES......Page 103 Part II Fiscal policies......Page 107 1 Introduction......Page 109 2 Credibility issues......Page 111 2.2 The link between fiscal policy and the inflation problem......Page 112 3 Stabilisation issues......Page 122 3.1 Decentralised fiscal policies......Page 124 3.2 Fiscal federalism and macroeconomic stabilisation......Page 133 4 Institutional issues......Page 136 4.1 Rationales for existing institutional constraints on fiscal discretion......Page 137 4.2 Alternative proposals for guaranteeing fiscal discipline......Page 139 4.3 Institutions for fiscal policy coordination......Page 142 5 Concluding remarks......Page 143 REFERENCES......Page 144 1 Introduction......Page 152 1991......Page 154 2001......Page 155 Exhibit 3 (The European Commission on Ireland’s fiscal indiscipline)......Page 156 Exhibit 6 (The European Central Bank on inflationary fiscal policy, II)......Page 157 2 The objective functions of monetary and fiscal authorities......Page 160 2.1 Review of the literature on fiscal and monetary policy coordination......Page 163 3 Monetary and fiscal policy with decentralised fiscal authorities......Page 165 3.1 Case I: both governments use LFj......Page 166 4 Comparative statics......Page 167 5 Conclusions and implications for policy analysis......Page 171 REFERENCES......Page 172 1 Introduction......Page 175 1.1 The short story of European fiscal coordination......Page 176 2 The model......Page 178 2.2 The ECB......Page 182 2.3 The governments......Page 184 3 Five possible scenarios......Page 187 3.1 No coordination......Page 188 3.2 Positive coordination......Page 189 3.3 Negative coordination......Page 194 3.4 The interaction of positive and negative coordination......Page 198 4 Conclusions......Page 200 Appendix......Page 202 5.1 Calculation of some signs......Page 204 5.2 Coefficients of government reaction function when the allocation of instruments is indifferent......Page 205 5.3 Positive formal coordination weakens the SGP......Page 206 REFERENCES......Page 207 8 The macroeconomic impact of different speeds of debt stabilisation in EMU......Page 209 1 The model......Page 210 1.1 The consumer’s problem......Page 211 1.2 The firm’s problem......Page 215 1.3 The government......Page 217 2.1 The symmetrical steady state of the model......Page 218 2.2 Linearising the model around the steady state......Page 220 3.1 Calibration......Page 225 3.2 Simulations......Page 227 4 Conclusion......Page 239 REFERENCES......Page 240 1 Introduction......Page 242 2 Related literature......Page 243 3 Recent trends of fiscal aggregates in four OECD countries......Page 246 4 A model of fiscal policy regimes......Page 248 4.1 VAR structure and estimation......Page 249 4.2 What are fiscal policy variables?......Page 251 4.3 The fiscal policy regimes......Page 252 5 Empirical findings......Page 254 5.1 Impulse response analysis......Page 258 5.2 Responses to a tax shock......Page 262 5.3 Forecast error variance decomposition......Page 264 6 Conclusions......Page 269 OECD Main Economic Indicators......Page 270 Public wages......Page 271 REFERENCES......Page 272 1 Introduction......Page 274 2 Models of fiscal–monetary interactions......Page 276 3 Empirical issues and the econometric methodology......Page 277 4.1 Standard SVAR, full sample estimates......Page 282 4.2 Robustness checks: identification and non-linearities......Page 283 4.3 Subsample estimates......Page 285 4.5 Bayesian VAR estimates......Page 287 Data appendix......Page 289 Figures......Page 290 REFERENCES......Page 312 Part III Labour markets......Page 315 1 Introduction......Page 317 2 A baseline model: CB–labour unions interaction when the CB directly controls inflation......Page 320 2.1 The labour market......Page 321 2.2 Equilibrium......Page 322 2.3 Factors affecting unions’ bargaining power......Page 323 3 CB–labour union interaction in the presence of monopolistically competitive price setting firms......Page 326 3.1 The model......Page 327 3.2 Equilibrium......Page 329 3.3 Central bank conservativeness, accommodation and unions’ bargaining power......Page 332 4.1 The populist central bank result......Page 333 4.2 Deterrence through fear of unemployment versus deterrence through fear of inflation......Page 334 5.1 The strategic effect of replacing independent national monetary policies by a monetary union......Page 336 5.2 The strategic effect of replacing a German dominated ERM by a monetary union......Page 337 5.3 Monetary union and labour market reform......Page 338 5.4 Open economy extensions......Page 339 6 Concluding remarks......Page 340 REFERENCES......Page 341 1 Introduction......Page 345 2 The world economy......Page 347 2.2 Preferences of.........Page 348 2.3 Resource constraints......Page 350 2.4 A useful reduced form......Page 351 3 Strategic monetary policy......Page 352 3.1 Price setting......Page 353 3.2 Optimal monetary policy......Page 354 3.3 Wage setting......Page 355 4 Macroeconomic performance and the monetary policy regime......Page 357 4.1 International wage coordination......Page 358 REFERENCES......Page 360 1 Introduction......Page 362 2 The model......Page 365 3.1 One-way mobility......Page 369 3.2 Two-way mobility......Page 370 3.3 Discussion of results......Page 371 4 Wage and price flexibility......Page 374 5.1 Data......Page 376 5.2 N-countries......Page 379 5.3 E-countries......Page 381 6 Conclusions......Page 382 REFERENCES......Page 383 Index......Page 385 The European Central Bank : A View From Across The Ocean / Stephen G. Cecchetti -- Which Measure Of Inflation Should The Ecb Target? / C. A. Tavero -- An Evaluation Of Alternative Targeting Rules For The Ecb / Pierpaolo Benigno And J. David López-salido -- Inflation Modelling In The Euro Area / Fabio C. Bagliano, Roberto Golinelli And Claudio Morana -- The Interaction Between Monetary And Fiscal Policies In A Monetary Union : A Review Of Recent Literature / Roel Beetsma And Xavier Debrun -- Independent Or Coordinated? Monetary And Fiscal Policy In Emu / Luca Lambertini And Riccardo Rovelli -- Interaction Of Fiscal Policies In The Euro Area : How Much Pressure On The Ecb? / Luca Onorante -- The Macroeconomic Impact Of Different Speeds Of Debt Stabilisation In Emu / Campbell Leith And Simon Wren-lewis -- Fiscal Shocks And Policy Regimes In Some Oecd Countries / Giuseppe De Arcangelis And Serena Lamartina -- Monetary And Fiscal Policy Interactions Over The Cycle : Some Empirical Evidence / V. Anton Muscatelli, Patrizio Tirelli And Carmine Trecroci -- Monetary Institutions, Monetary Union And Unionized Labor Markets : Some Recent Developments / Alex Cukierman -- Inflationary Performance In A Monetary Union With Large Wage Setters / Lilia Cavallari -- On The Enlargement Of Currency Unions : Incentives To Join And Incentives To Reform / Andrew Hughes Hallett And Svend E. Hougaard Jensen. Edited By R. Beetsma ... [et Al.]. Includes Bibliographical References And Index. The European Central Bank : a view from across the ocean / Stephen G. Cecchetti Which measure of inflation should the ECB target? / C. A. Favero An evaluation of alternative targeting rules for the ECB / Pierpaolo Benigno and J. David Lopez-Salido Inflation modelling in the euro area / Fabio C. Bagliano, Roberto Golinelli and Claudio Morana The interaction between monetary and fiscal policies in a monetary union : a review of recent literature / Roel Beetsma and Xavier Debrun Independent or coordinated? Monetary and fiscal policy in EMU / Luca Lambertini and Riccardo Rovelli Interaction of fiscal policies in the euro area : how much pressure on the ECB? / Luca Onorante The macroeconomic impact of different speeds of debt stabilisation in EMU / Campbell Leith and Simon Wren-Lewis Fiscal shocks and policy regimes in some OECD countries / Giuseppe De Arcangelis and Serena Lamartina Monetary and fiscal policy interactions over the cycle : some empirical evidence / V. Anton Muscatelli, Patrizio Tirelli and Carmine Trecroci Monetary institutions, monetary union and unionised labor markets : some recent developments / Alex Cukierman Inflationary performance in a monetary union with large wage setters / Lilia Cavallari On the enlargement of currency unions : incentives to join and incentives to reform / Andrew Hughes Hallett and Svend E. Hougaard Jensen. Following the birth of the European Monetary Union (EMU) economists are still divided in their assessment of the ability of its key institutions to provide macroeconomic stability and foster the reforms necessary to stimulate economic growth. In this collection, experts focus on issues of fiscal policy, monetary policy and labour markets and ask: Can the stability and growth pact provide an adequate framework for the conduct of national fiscal policies? Is the ECB reacting with competence and flexibility to a rapidly changing macroeconomic environment? How do national labour markets react to the macroeconomic institutions and what are the structural reforms needed in labour markets? Blending empirical and theoretical data, this book offers one of the most comprehensive surveys of research in macroeconomic policymaking within the EMU. Three years after the birth of the European Monetary Union (EMU) economists are still divided in assessing the ability of its key institutions to provide macroeconomic stability and foster necessary reforms. Blending empirical and theoretical data, experts offer a comprehensive survey of recent research in macroeconomic policymaking within the EMU