Costs of European Monetary Union: Evidence of monetary and fiscal policy effectiveness

Costs of a monetary union are typically analysed in the context of the optimum currency area approach, looking at the likelihood of asymmetric real disturbances, the degree of real wage flexibility and of labour mobility. But it is also important to consider the leeway of monetary and fiscal policy to respond to country-specific real shocks prior to entering the monetary union. Applying a structural VAR model to Austria, Belgium, the Netherlands, Sweden, Finland, France, Italy and the United Kingdom indicates that costs of giving up autonomous monetary policy in a European Monetary Union (EMU) would generally not be too high. Only in Italy and the United Kingdom autonomous monetary policy has shown positive short-run output effects in the past, in all other countries such effects are negligible or not significant. Some cushioning influence of adverse EMU effects, then, could be expected from autonomous fiscal policy measures, since results suggest that, with the exception of Finland and again Italy and the United Kingdom, autonomous fiscal policy had positive short-run output effects in the past in all cases, those effects being somewhat more pronounced in Belgium and Sweden.

Fiscal deficits and sustainability of fiscal position in the EU-Countries

This paper calculates structural balances for EU-countries and relates them to fiscal sustainability. Although the Stability Pact implicitly accepts the need to distinguish between the structural and the cyclical component of net deficits, the issue of long-term sustainability is only covered by the need not to exceed a certain threshold value of the net lending. While the OECD and the European Commission (EU) assume constant elasticities when calculating cyclical budget components to derive structural deficits from the net deficits, the present paper choses time series technique to extract the structural balances directly. = Structural balances are calculated on a disaggregated level considering five different government receipts and expenditure components. With the same method, structural primary balances are estimated to analyse long-term sustainability of fiscal policy in the EU. Therefore, we set the structural primary surpluses against those primary balances, necessary to stabilise the debt to GDP ratio. It is shown that in some of the so-called core-countries like Germany and France, structural surpluses are still below those required to stabilize the debt ratio.

Effects of the ECB's Unconventional Monetary Policy on Real and Financial Wealth

We assess the impact of the ECB's unconventional monetary policy (UMP) on the wealth distribution of households in ten euro area countries. For this purpose, we estimate the effects of an ECB balance sheet expansion on financial asset and housing prices by means of vector autoregressions. We then use the estimates to carry out micro simulations based on data from the Household Finance and Consumption Survey (HFCS). We find that the overall effect of UMP on the net wealth distribution of households differs depending on which wealth inequality indicators we use. There is an inequality-increasing effect for the majority of the countries under review when we use wealth inequality indicators that are sensitive to changes at the tails of the wealth distribution. The effect is more equalizing when we base our assessment on the Gini coefficient. It is also important to note that one-third of the households in our sample does not hold financial or housing wealth and is thus not directly affected by UMP measures via the asset price channel.Series: Department of Economics Working Paper Serie

Sectoral Deleveraging in Europe and Its Economic Implications

We examine net lending/net borrowing and the underlying debt dynamics at the sectoral level in the European Union. Saving and investment patterns indicate that there have been considerable deleveraging efforts since the start of the global financial crisis, particularly in the nonfinancial corporate and household sectors. In many EU countries, however, this decline in credit transactions has not yet led to a significant reduction of sectoral debt-to-GDP ratios. Subdued output growth and low or even negative inflation rates have undermined the deleveraging process and increased real debt burdens in a number of European economies. Since these are often the countries that had experienced strong credit booms prior to the crisis, rebalancing needs are likely to persist and may be a significant drag on the recovery in the near future. Furthermore, most of the ongoing rebalancing - both in terms of debt levels and current account deficits - is based on a sharp decline in investment rather than an increase in saving, which might lead to lower potential growth in the future. Recent developments may even jeopardize the catching-up process of peripheral euro area countries and non-euro area EU Member States in Central, Eastern and Southeastern Europe

The impact of macroprudential policies on capital flows in CESEE

In line with recent policy discussions on the use of macroprudential policies (MPPs) to respond to cross-border risks arising from capital flows, this paper tries to quantify which impact MPPs had on capital flows in Central, Eastern and Southeastern Europe (CESEE). This region experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to a tightening in the macroprudential environment, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model and include an intensity-adjusted macroprudential policy index to identify MPP shocks. Our results suggest that tighter MPPs translate into negative dynamic reactions of domestic private sector credit growth and gross capital inflow volumes in a majority of the countries analyzed. Level and volatility responses of capital inflows are often correlated positively, suggesting that if MPPs were successful in reducing capital inflows, they would also contribute to lower capital flow volatility. We also provide evidence that the effects of MPP tightening are in most cases stronger in an environment characterized by low interest rates, suggesting that MPPs would be more effective if conventional monetary policy were facing constraints

Room for manoeuvre of economic policy in EU countries are there costs of joining EMU?

Costs of a monetary union are typically analysed in the context of the optimum currency area approach, looking at the likelihood of asymmetric real disturbances, the degree of real wage flexibility and of labour mobility. But it is also important to consider the leeway of monetary and fiscal policy to respond to country-specific real shocks prior to entering the monetary union. Applying a structural VAR model to Austria, the Netherlands, Belgium, Sweden, Finland, Italy, United Kingdom, France and Spain indicates that costs of giving up autonomous monetary policy in a European Monetary Union (EMU) would generally not be too high. However, in Belgium, Finland, Italy, France and Spain autonomous monetary policy has shown positive short-run output effects in the past, in all other countries such effects are negligible or not significant. Some cushioning influence of adverse EMU effects, then, could be expected from autono-mous fiscal policy measures, since results suggest that autonomous fiscal policy had positive short-run output ratio effects in the past, those effects being pronounced in Sweden, Finland, United Kingdom and France. It is also shown that autonomous monetary and fiscal policy were both capable of dampening country-specific business cycles. Consequently, EMU could reduce the degree of synchronisation of output fluctuations across Europe.

Efficiency and Transparency of the Monetary Policy Strategy of the ESCB

The Treaty of Maastricht specified the goals for monetary policy: According to Art. 105(1), the primary objective of the European System of Central Banks (ESCB) is to maintain price stability. However, the Treaty also stipulates that, without prejudice to the objective of price stability, the ESCB is to support, above all, a high level of employment. This can be interpreted to mean that policy makers assigned the ESCB the tasks to maintain price stability and to stabilise output across business cycles. In October 1998, the ESCB announced its monetary policy strategy, i.e., a framework for policy decisions that is deemed appropriate to achieve these goals. Within this strategy, money is given a prominent role: the ESCB published a reference value for the broad monetary aggregate M3 that is designed to be consistent with, and serve the achievement of price stability. Furthermore, a broadly based assessment of the outlook for future price developments and the risks to price stability in the euro area will play a major role in the ESCB's strategy This strategy is neither a money supply targeting, nor an inflation targeting strategy. Contrary to the strategy of the Deutsche Bundesbank, the ESCB clearly states that it will not respond automatically to deviations of current money growth from the announced reference value. Unlike in the case of inflation targeting, it will publish neither its inflation forecast nor an explicit inflation target. The present article discusses whether the monetary strategy of the ESCB is optimal, i.e., whether it is efficient and transparent. It is argued that the strategy has the potential of efficiency, of fulfilling the goals of monetary policy in an optimal way, if the ESCB follows flexible inflation targeting in practice. Money supply targeting is considered inappropriate, since there is insecurity about whether important preconditions for the appropriateness of money supply targeting, such as stability and controllability of money demand, are fulfilled in the Monetary Union. An increasingly important prerequisite for the optimality of a strategy is transparency. Increased transparency makes the central bank's reputation more sensitive to its actions and induces the central bank to gear its policy to come closer to that with the greatest social benefit. Transparency is crucial for accountability. The strategy of the ESCB lacks full transparency. Publishing conditional inflation forecasts would give the public the option to monitor and evaluate the central bank's policy and to assess its coincidence with the monetary policy goals assigned to the ESCB.Effizienz und Transparenz der geldpolitischen Strategie des ESZB; Schwerpunkt "Geldpolitik in der Europäischen Währungsunion"; Efficiency and Transparency of the Monetary Policy Strategy of the ESCB