Money in the Inflation Equation: the Euro Area Evidence

The ECB is the only major central bank that still emphasizes the role of money in monetary policy management. In this paper, we bring some support to this approach. Taking into account Euro area data from the period between 1999 and 2007, we demonstrate that a steady 10 per cent increase in M3 may result in an inflation rate of approximately 2½ percentage points. A negative output gap would have a short term offsetting effect, and vice versa.ECB; Inflation; Monetary Policy; Money

Tax Competition and Information Sharing in Europe: A Signaling Game

This paper provides a challenging view to the tax harmonization issue. The literature often proposes tax harmonization to avoid free-riding behaviors in free-trade areas, and more particularly in monetary unions. Countries may decrease their tax rates in order to develop tax competitive advantage and attract capital. Without tax harmonization, tax autonomy may lead to a “race to the bottom.” The model proposed here uses a game-theoretical approach to analyze this question. It shows that tax competition may lead to stability. The mechanism leading to this outcome rests upon the impact of the signal given by both players. If a country gives the signal that “friendly” taxation behavior is not its priority, the result can be a “race to the bottom”. Conversely, if both countries signal their ability to conduct such a war, this war will not occur, and the stability of the system will be ensured.Monetary union, Economic integration, Tax competition, Tax harmonization, Fiscal competition

Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View

This paper addresses the question of the likelihood of a race to the bottom in a monetary union, like the Euro-zone, that could result from tax competition between countries. This fear of a race to the bottom is used both in the economic literature and the political arena to promote tax harmonization. Using a game theoretical approach with the costs of changing tax policies to analyze the conditions of a race to the bottom, this paper shows that countries may not choose such an extreme strategy. In other words, the extreme case scenario of a race to the bottom is unlikely, and proponents of tax harmonization should base their reasoning upon other assumptions.Monetary union, Economic integration, Tax competition, Tax harmonization, Fiscal competition

Money and risk aversion in a DSGE framework : a bayesian application to the euro zone

Cet article présente un modèle théorique et empirique de la zone euro, en mettant en perspective le rôle de la monnaie. Le modèle s'inscrit dans le cadre " Nouveaux Keynésiens-DSGE ", la monnaie étant introduite dans la fonction d'utilité des ménages sous une forme non-séparable. En testant le modèle selon la méthode bayésienne nous expliquons la variance de la production et de l'inflation, mais aussi du taux d'intérêt, des balances réelles, de la production et des balances réelles en prix flexibles. Le rôle de la monnaie est analysé plus particulièrement. Nous montrons que son impact sur la production dépend du degré d'aversion au risque des agents, qu'il augmente avec ce degré, et qu'il devient significatif quand l'aversion au risque inter-temporel est suffisamment élevée. L'impact direct de la monnaie est en revanche très limité pour expliquer la variance de l'inflation, la politique monétaire, via le taux d'intérêt, constituant le facteur dominant.Estimation bayésienne ; Modèle DSGE ; Monnaie ; Zone euro

Money and Risk Aversion in a DSGE Framework: A Bayesian Application to the Euro Zone

In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents’ risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor.Bayesian Estimation; DSGE Model; Euro Area; Money

Tax Harmonization versus Tax Competition in Europe: A Game Theoretical Approach

The purpose of this paper is to use a game theoretical approach to analyze tax harmonization, or competition, in a monetary union, more specifically in Europe. Without harmonization, free-riding behaviors may appear, leading to a sub-optimal tax equilibrium. Tax competition may also create budgetary problems and the objective of a balanced budget may not be attained. But national tax autonomy has one main advantage: as monetary policy is 'federalized', and as fiscal policy is constrained by the Stability and Growth Pact, taxation becomes the last macroeconomic instrument within governments' hands to deal with asymmetric shocks. The literature often condemns tax autonomy because of possible free-riding behaviors. In such a case, the competition could conduct to the lowest tax rate of all countries, condemning others to diminish their public spending. But, this analysis rests on a static point of view: In that case, harmonization with strict rules is Pareto-optimum. In the dynamic case, as harmonization costs are not incurred, the final equilibrium may be of a higher welfare level. Coordination would occur without the need for strict rules. If countries maintain sound public finance, tax competition would not lead to a 'race to the bottom'. L'objet de ce papier est d'utiliser une approche en terme de théorie des jeux afin d'étudier les questions d'harmonisation ou de compétition fiscale au sein d'une union monétaire. Plus spécifiquement, cette étude concerne l'Union économique et monétaire et le risque de « guerre d'usure ». Les arguments traditionnels sont d'une part que sans harmonisation, des comportements de « free-riding » peuvent apparaître, menant à un équilibre sous optimal en matière de politique fiscale, et d'autre part que la compétition peut aussi être à l'origine de problèmes importants en matière d'équilibre budgétaire. Mais l'autonomie fiscale a un avantage majeur. Lorsque la politique monétaire n'est plus du ressort des pays et lorsque la politique budgétaire est contrainte par le Pacte de stabilité et de croissance, l'instrument fiscal devient le dernier outil macro-économique à la disposition des gouvernements pour absorber les chocs asymétriques. Le modèle proposé est construit sous deux horizons. Si l’horizon est fini, les conclusions traditionnelles de la littérature en faveur de l'harmonisation sont représentées. Avec un horizon infini, les joueurs prennent en compte les coûts de dévier et d'entrer dans une guerre d'usure. La coordination apparaît alors sans qu'il y ait besoin d'un mécanisme institutionnel pour la forcer.Monetary union, Economic integration, Tax competition, Tax harmonization, Fiscal competition

Money in a DSGE framework with an application to the Euro Zone

In the current New Keynesian literature, the role of monetary aggregates is generally neglected. Yet it’s hard to imagine money completely “passive” to the rest of the system. By entering real money balances in a non-separable utility function, we introduce an explicit role for money via preference redefinition in a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. It involves new inflation and output gap specifications where money plays a significant role. We use the General Method of Moments (GMM) to calibrate our DSGE model of the Euro area and we show that the European Central Bank –ECB) should react more strongly to economic shocks as far as the role of money is found significant.ECB; Inflation; Monetary Policy; Money

Money in a DSGE framework with an application to the Euro Zone

Le «nouveau keynésianisme» actuel néglige le rôle des aggrégats monétaires dans la détermination de l¿équilibre économique. On peut se poser des questions sur cette vision tant il est difficile d¿admettre que la monnaie serait une variable «passive» du système économique. En introduisant les balances réelles dans une fonction d¿utilité non-séparable, cet article incorpore explicitement le rôle de la monnaie dans un modèle du type DSGE. Cette spécification débouche sur des équations d¿inflation et d¿output gap dans lesquelles les encaisses monétaires jouent un rôle significatif. Le modèle DSGE est calibré par la General Method of Moments (GMM) appliqué aux données de la zone Euro. Les résultats et l¿analyse démontrent que dans la mesure où la croissance monétaire joue un rôle significatif, la BCE devrait réagir plus vigoureusement aux chocs économiques qu¿elle ne le fait généralement.BCE ; Inflation ; Monnaie ; Politique monétaire

Money and risk aversion in a DSGE framework: a Bayesian application to the Euro zone

In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using Bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents' risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor

The role of money and monetary policy in crisis periods: the Euro area case

In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We …find that money has a rather signi…ficant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we …find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.Euro area ; Money ; DSGE forecasting