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Currency Unions, the Phillips Curve, and Stabilization Policy: Some Suggestions for Europe

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  • Thomas I. Palley

    (Economics of Democratic and Open Societies, Washington, DC)

Abstract

This paper examines the implications of a currency union for monetary policy. The formation of a currency union worsens the inflation-unemployment tradeoff, so that leaving the inflation target unchanged at its pre-currency union level generates increased unemployment. Geographically based fiscal automatic stabilizers can improve the inflation-unemployment trade-off, which has bearings on the Euro area’s Stability and Growth Pact. Financial intermediary balance sheet regulation based on asset-based reserve requirements (ABRR) can provide additional country-specific policy instruments. ABRR alleviate the targets and instruments problem afflicting the monetary authority in a currency union context. This is important for the European Central Bank, which is trying to manage divergent country growth rates with a single interest rate instrument.

Suggested Citation

  • Thomas I. Palley, 2006. "Currency Unions, the Phillips Curve, and Stabilization Policy: Some Suggestions for Europe," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 3(2), pages 351-369.
    • Handle: RePEc:elg:ejeepi:v:3:y:2006:i:2:p:351-369
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    Cited by:

    1. Engelbert Stockhammer & Eckhard Hein & Lucas Grafl, 2011. "Globalization and the effects of changes in functional income distribution on aggregate demand in Germany," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(1), pages 1-23.
    2. Engelbert Stockhammer & Stefan Ederer, 2008. "Demand effects of the falling wage share in Austria," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(5), pages 481-502, December.

    More about this item

    Keywords

    currency unions; Phillips curve; monetary policy; fiscal policy; asset based reserve requirements;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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