A Reform Proposal for EMU Institutions

In this paper, we discuss a reform proposal for EMU macroeconomic institutions which rests on the generalised adoption of targets, for both monetary and fiscal policies, to be integrated by a system of checks and balances. The new arrangements for fiscal policies should induce EMU countries to internalise the external effects of their own policies, therefore allowing a partial relaxation of the SGP limits to national debt policies. As for monetary policy, we propose the adoption of an inflation target, the assignment of ex-post assessing powers to the Euro12-group and an internal reform of the ECB. The latter should limit undue nationalistic influences within the ECB governing bodies.EMU, Institutional design

Fiscal Policy and Inflation Targets: Does Credibility Matters?

We reconsider Svensson’s inflation-targeting proposal in a model where the need to raise seigniorage revenues determines the socially optimal inflation rate and distortionary taxes cause the inflation bias. Interpreting the targets as contracts, we show that the interaction between fiscal and monetary policy complicates the structure of the optimal contract. Moreover, if the commitment technology is imperfect, «highish» targets generate lower inflation than targets, which are too low to be credible. Alternatively, interpreting inflation targets as policy delegation to a non-distortionary target-conservative agent, we show that target-conservative bankers are public-expenditures conservative. Unfortunately, only idiosyncratic views about the benefits from public expenditures can be invoked to justify expenditures-conservatism, implying that target-conservative agents are also weight-conservative.Central bank independence, Inflation targets

Fiscal Policy and Imperfectly Credible Targets: Should We Appoint Expenditure-Conservative Central Bankers?

We reconsider Svensson’s inflation-targeting proposal in a model where the need to raise seigniorage revenues determines the socially optimal inflation rate and distortionary taxes cause the inflation bias. Interpreting the targets as contracts, we show that the interaction between fiscal and monetary policy complicates the structure of the optimal contract. Moreover, if the commitment technology is imperfect, “highish” targets generate lower inflation than targets which are too low to be credible. Then we turn to an interpretation of inflation targets as monetary policy delegation to a nondistortionary, target-conservative agent. In our model target-conservative bankers are public-expenditure conservative. Expenditure-conservatism may explain why central bank independence is orthogonal to output variability.

A Simple and Flexible Alternative to the Stability and Growth Pact Deficit Ceilings. Is it at hand?

There have been widespread criticisms of EMU fiscal institutions. We consider a simple alternative to the deficit ceilings envisaged in the Stability and Growth Pact. We advocate the adoption of deficit targets. National governments should retain discretion in setting deviations from targets, but these deviations should then be reversed following a predetermined rule. This ensures fiscal discipline and leaves room for stabilisation policies. For the rule to be credible, only small changes are required to current EMU institutions. Our scheme performs well in comparison with existing reform proposals and is consistent with the golden rule of deficit financing.

Rethinking EMU Institutions

Building on widespread criticisms of current EMU institutional arrangements, we sketch a reform proposal for EMU macroeconomic institutions. We advocate the adoption of targets for both monetary and fiscal policies, to be integrated by a system of checks and balances. As for fiscal policy, expenditures, taxation and deficit targets will strengthen the governments commitment and, at the same time, facilitate "wellbehaved" stabilisation policies. Turning to monetary policy, inflation targeting, alongside with the assignment of ex-post assessing powers to the European Parliament and an internal reform of the ECB, will limit undue nationalistic influences within the ECB governing bodies.

Do we really need to tame a conservative ECB? When the policy mix matters.

This paper contributes to the goal-versus-instrument independence debate for the ECB exploring how these alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is sufficiently flexible, appointing a goal independent (i.e. conservative) central banker dominates inflation targeting. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation. This result provides theoretical content to the claim that a strong and goal-independent ECB needs a political match able to engineer countercyclical fiscal policies.

A Nominal Income Growth Target for a Conservative ECB? When the policy mix matters

This paper contributes to the goal-versus-instrument independence debate for the ECB, exploring how alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is countercyclical, a constant nominal income growth target should be assigned to a conservative central banker. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation.

A simple and flexible alternative to the Stability and Growth Pact deficit ceilings. Is it at hand?

We use a simple theoretical model of a monetary union where myopic discretionary fiscal policies generate excessive debt accumulation in steady state and inefficiently delayed debt adjustment following a shock. We advocate the adoption of a flexible debt targeting approach. By setting a long-term debt target and by raising the political cost associated to deviations from the optimal pace of debt reversal following a shock¸ institutional design induces the fiscal policymaker to implement unbiased discretionary responses to shocks. Since the power to discipline fiscal policymakers rests in the hands of national voters, this outcome can be achieved by increasing the transparency of the decision-making process, where national voters understand the long-term consequences of fiscal policies. In practice, we call for clearer and more focused supervision tasks for the European Commission and for a more active role of national Parliaments whenever a disagreement arises between the Commission and a national government.

Disegno delle istituzioni e stabilità finanziaria nell'Unione Monetaria Europea

In this paper, the consequences on financial stability of the institutional design envisaged in the Maastricht Treaty – which implicitly assigns the objective of financial stability to the National Central Banks (NCBs) – are assessed. The Maastricht Treaty spells out precisely the role of the European Central Bank (ECB) and NCBs within the European System of Central Banks (ESCB) as to achieve the objective of price stability, but it is not equally clear as far as the objective of financial stability is concerned. In an area like EMU with a high degree of financial and economic integration, the actions undertaken by NCBs in the fields of regulation, prudential supervision and Lending of Last Resort are characterized by relevant externalities across jurisdictions. The present institutional design does not allow EMU to benefit from the internalization of these spillovers since NCBs do not face incentives to undertake properly banking policy activities. Applying the principle of subsidiarity to the problem of power sharing between ECB and NCBs, the following suggestions for a revision of the institutional design are obtained: i) ECB should be assigned the task of coordinating regulation activities to avoid regulatory arbitrage, while prudential supervision should be managed jointly in a two-tier system by ECB and NCBs; the decision process pertaining the use of discount window and the Lending of Last Resort function should be centralized; ii) the rules pertaining the working of TARGET and EMS 2 should be changed in order to limit the risk of a financial crises imported from pre-ins countries