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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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  • Joerg Bibow

    ()
    (Franklin College, Lugano, Switzerland)

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    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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    Bibliographic Info

    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
    Date of revision:
    Handle: RePEc:imk:studie:01-2006

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    References

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    1. Gaston Gelos & Alessandro Prati & Oya Celasun, 2004. "Obstacles to Disinflation," IMF Working Papers, International Monetary Fund 04/111, International Monetary Fund.
    2. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers, C.E.P.R. Discussion Papers 750, C.E.P.R. Discussion Papers.
    3. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics, EconWPA 0407026, EconWPA.
    4. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 16(4), pages 1-32, Winter.
    5. Fritz Breuss, . "Macroeconomic Effects of EU Enlargement for Old and New Members," WIFO Working Papers, WIFO 143, WIFO.
    6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
    7. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics, EconWPA 0507017, EconWPA.
    8. Christopher Allsopp & Michael J. Artis, 2003. "The Assessment: EMU, Four Years On," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 19(1), pages 1-29.
    9. Luis Catão & Marco Terrones, 2003. "Fiscal Deficits and Inflation," IMF Working Papers, International Monetary Fund 03/65, International Monetary Fund.
    10. Stephen G. Cecchetti & RÛisÌn O'Sullivan, 2003. "The European Central Bank and the Federal Reserve," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 19(1), pages 30-43.
    11. Joerg Bibow, 2004. "Haushaltskonsolidierungsstrategien im Vergleich. Warum die deutsch-europaeische Fiskalpolitik versagt," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 1(2), pages 75-106.
    12. Jörg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Macroeconomics, EconWPA 0103004, EconWPA.
    13. Oya Celasun & R. Gaston Gelos & Alessandro Prati, 2004. "Obstacles to disinflation: what is the role of fiscal expectations?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 19(40), pages 441-481, October.
    14. Dexter, Albert S. & Levi, Maurice D. & Nault, Barrie R., 2002. "Sticky prices: the impact of regulation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(4), pages 797-821, May.
    15. Jorg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Economics Working Paper Archive, Levy Economics Institute wp_323, Levy Economics Institute.
    16. Jorg Bibow, 2002. "The Markets versus the ECB, and the EURO's Plunge," Eastern Economic Journal, Eastern Economic Association, Eastern Economic Association, vol. 28(1), pages 45-57, Winter.
    17. Jorg Bibow, 2001. "Making EMU Work: Some lessons from the 1990s," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(3), pages 233-259.
    18. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(481), pages 459-480, July.
    19. Dyson, Kenneth & Featherstone, Kevin, 1999. "The Road To Maastricht: Negotiating Economic and Monetary Union," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296386, October.
    20. Jorg Bibow, 2005. "Germany in crisis: the unification challenge, macroeconomic policy shocks and traditions, and EMU," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 19(1), pages 29-50.
    21. Jörg Bibow, 2001. "Making EMU Work: Some Lessons from the 1990s," Macroeconomics, EconWPA 0103008, EconWPA.
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    Citations

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    Cited by:
    1. Jörg Bibow, 2013. "Lost at Sea:The Euro Needs a Euro Treasury," FMG Special Papers, Financial Markets Group sp227, Financial Markets Group.
    2. Jorg Bibow, 2006. "How the Maastricht Regime Fosters Divergence as Well as Fragility," Economics Working Paper Archive, Levy Economics Institute wp_460, Levy Economics Institute.
    3. Catherine Mathieu & Henri Sterdyniak, 2007. "The Stability and Growth Pact: Stability without growth?," Sciences Po publications info:hdl:2441/5468, Sciences Po.
    4. Eckhard Hein & Achim Truger, 2006. "Germany's post-2000 stagnation in the European context - a lesson in macroeconomic mismanagement," IMK Working Paper, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute 03-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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