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Divergences in the Euro Area: a Cause for Concern?

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  • Björkstén, Nils
  • Syrjänen, Miika

    ()
    (Bank of Finland)

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    Abstract

    Evidence suggests that after a period of convergence in the early and mid-1990s, the euro area economies may have started diverging. As a consequence, the common monetary policy could become well-suited for a number of countries. This paper studies the extent and severity of the recent divergences, and discusses the capacity of exposed countries to compensate for nationally suboptimal monetary conditions through other policy channels. As a step toward developing an analytical framework for monitoring intra-euro area developments, we present a "convergence barometer" to monitor divergences, and a Taylor rule based "monetary thermometer" to compare the common monetary policy to benchmark optimal policy for individual countries. A main conclusion is that policymakers at the euro area level should be concerned about divergences, since automatic stabilisers alone may not be enough to restore a healthy equilibrium to potential "outlier" countries.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/9911.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 11/1999.

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    Length: 34 pages
    Date of creation: 01 Sep 1999
    Date of revision:
    Handle: RePEc:hhs:bofrdp:1999_011

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: euro; EMU; divergence; Taylor rule;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 65-113, 04.
    2. Angeloni, Ignazio & Dedola, Luca, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 0004, European Central Bank.
    3. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28.
    4. Willem H. Buiter, 1999. "Alice in Euroland," Journal of Common Market Studies, Wiley Blackwell, vol. 37(2), pages 181-209, 06.
    5. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
    6. Taylor, J.B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by European Central Bank," Papers 649, Stockholm - International Economic Studies.
    7. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
    8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    9. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics 20226, London School of Economics and Political Science, LSE Library.
    10. Eichengreen, Barry, 1998. "European Monetary Unification: A Tour d'Horizon," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 24-40, Autumn.
    11. Tyrväinen, Timo, 1998. "What Do We Know about Productivity Gaps and Convergence in EMU Economies?," Research Discussion Papers 31/1998, Bank of Finland.
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    Cited by:
    1. Christophe Blot, 2002. "Les politiques budgétaires au sein de l’UEM : entre convergence et asymétrie," Revue d'Économie Financière, Programme National Persée, vol. 69(5), pages 247-268.

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