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EMU@10: Coping with Rotating Slumps

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Author Info
Oliver Landmann () (Department of International Economic Policy, University of Freiburg)
Abstract

On the eve of the financial and economic crisis of 2008/09, the European Economic and Monetary Union (EMU) could look back to a decade of remarkable macroeconomic stability. Somewhat surprisingly, though, inflation differentials across member states have been substantial and persistent, causing large cumulative changes in relative price levels. This paper presents a stylized theoretical model of a monetary union which demonstrates how persistent inflation differentials can arise from inflation inertia in conjunction with the loss of monetary control on the national level. The interaction of inflation and output dynamics which is at the core of the model generates a pattern of ‘rotating slumps’ (a term coined by Blanchard 2007b). A number of implications are derived from the model which shed light on the observed behavior of cyclical conditions and inflation rates in the euro area. The paper concludes that the monetary-fiscal framework of EMU does not pay adequate attention to the need of dealing with internal macroeconomic tensions within the euro zone.

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Paper provided by Department of International Economic Policy, University of Freiburg in its series Discussion Paper Series with number 9.

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Length: 26 pages
Date of creation: Jul 2009
Date of revision: Jul 2009
Handle: RePEc:fre:wpaper:9

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Keywords: EMU;

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References listed on IDEAS
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  2. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation, Yale University. [Downloadable!]
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  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Kirsanova, Tatiana & Vines, David & Wren-Lewis, Simon, 2006. "Fiscal Policy and Macroeconomic Stability Within a Currency Union," CEPR Discussion Papers 5584, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Sebastian Dullien & Ulrich Fritsche, 2007. "Anhaltende Divergenz bei Inflations- und Lohnentwicklung in der Eurozone: Gefahr für die Währungsunion?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 76(4), pages 56-76. [Downloadable!] (restricted)
  6. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December. [Downloadable!] (restricted)
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  7. Tobin, James, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter. [Downloadable!] (restricted)
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  8. Hans-Werner Sinn, 2003. "The Laggard of Europe," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 4(SPECIALIS), pages 01-32, October. [Downloadable!]
  9. Ignazio Angeloni & Michael Ehrmann, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 7(1). [Downloadable!]
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