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Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement?

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Author Info
Joerg Bibow () (Franklin College, Lugano, Switzerland)
Abstract

This study challenges the widely held view that the persistence in Euro area inflation above two percent, which has been observed in the euro area since 2001 despite the economic slump, may have been foremost a reflection of “structural rigidities” in labour and product markets. Accordingly, structural reforms that eliminate these rigidities are presented as necessary and sufficient conditions for boosting growth and purging inflation persistence. This view misses the fact that series of hikes in indirect taxes and administered prices contributed significantly to price increases in the euro area. Governments’ consolidation efforts in view of stagnation-induced budgetary pressures thus caused “tax-push inflation”, i.e. a persistent and sizeable upward distortion in headline inflation. Since inflation above two percent has, in turn, forestalled more growth-supportive monetary policies, the euro area has become stuck in a vicious circle of protracted domestic demand stagnation and budgetary pressures that continue to nurture tax push.

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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Studies with number 01-2006.

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Length: 98 pages
Date of creation: Jan 2006
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Handle: RePEc:imk:studie:01-2006

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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.:
  1. Jörg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Macroeconomics 0103004, EconWPA. [Downloadable!]
  2. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April. [Downloadable!] (restricted)
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  4. Jorg Bibow, 2002. "The Markets versus the ECB, and the EURO's Plunge," Eastern Economic Journal, Eastern Economic Association, vol. 28(1), pages 45-57, Winter. [Downloadable!]
  5. Christopher Allsopp & Michael J. Artis, 2003. "The Assessment: EMU, Four Years On," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 1-29.
  6. Oya Celasun & Gaston R. Gelos & Alessandro Prati, 2004. "Obstacles to Disinflation: What is the Role of Fiscal Expectations?," IMF Working Papers 04/111, International Monetary Fund. [Downloadable!]
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  7. Jörg Bibow, 2001. "Making EMU Work: Some Lessons from the 1990s," Macroeconomics 0103008, EconWPA. [Downloadable!]
  8. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July. [Downloadable!] (restricted)
  9. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
  10. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Jörg Bibow, 2001. "Making EMU Work: some lessons from the 1990s," International Review of Applied Economics, Taylor and Francis Journals, vol. 15(3), pages 233-259, July. [Downloadable!] (restricted)
  12. JÖRG BIBOW, 2005. "Germany in crisis: the unification challenge, macroeconomic policy shocks and traditions, and EMU," International Review of Applied Economics, Taylor and Francis Journals, vol. 19(1), pages 29-50, January. [Downloadable!] (restricted)
  13. Jorg Bibow, 2001. "Making EMU Work: Some Lessons from the 1990s," Economics Working Paper Archive 326, Levy Economics Institute, The. [Downloadable!]
  14. Stephen G. Cecchetti & RÛisÌn O'Sullivan, 2003. "The European Central Bank and the Federal Reserve," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 30-43.
  15. Jorg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Economics Working Paper Archive 323, Levy Economics Institute, The. [Downloadable!]
  16. Dexter, Albert S. & Levi, Maurice D. & Nault, Barrie R., 2002. "Sticky prices: the impact of regulation," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 797-821, May. [Downloadable!] (restricted)
  17. Fritz Breuss, . "Macroeconomic Effects of EU Enlargement for Old and New Members," WIFO Working Papers 143, WIFO. [Downloadable!]
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  1. Joerg Bibow, 2006. "How the Maastricht Regime Fosters Divergence as Well as Fragility," Economics Working Paper Archive wp_460, Levy Economics Institute, The. [Downloadable!]
  2. Eckhard Hein & Achim Truger, 2006. "Germany's post-2000 stagnation in the European context - a lesson in macroeconomic mismanagement," IMK Working Paper 03-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
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