Real Exchange Rate Adjustment, Wage-Setting Institutions, and Fiscal Stabilization Policy: Lessons of the Eurozone's First Decade
In terms of macroeconomic performance, the Eurozone's first decade is a story of successful inflation-targeting by the ECB for the common currency area as a whole combined with the persistence of real exchange rate and current account disequilibria at member country level. According to the standard New Keynesian (NK) model of a small member of a currency union, policy intervention at country level is not necessary to ensure adjustment to country-specific shocks. Self-stabilization of shocks takes place through the adjustment of prices and wages to ensure that the real exchange rate returns to equilibrium. That this did not happen in the Eurozone appears to be related to the presence of non-rational wage setters in a number of member countries. A related second departure from the NK model was the transmission of non-rational inflation expectations to the real interest rate, propagating easy credit conditions in countries with inflation above target. Problems of real exchange rate misalignment among members were exacerbated by the ability of Germany's wage-setting institutions to deliver self-stabilization. The implications for policy focus on using fiscal policy to target the real exchange rate and/or on reforms to labour markets that deliver real exchange rate oriented wage setting. (JEL codes: E61, E62, E65, F41, O52) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: firstname.lastname@example.org, Oxford University Press.
Volume (Year): 59 (2013)
Issue (Month): 3 (September)
|Contact details of provider:|| Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK|
Phone: +49 (89) 9224-0
Fax: 01865 267 985
Web page: http://cesifo.oxfordjournals.org/
More information through EDIRC
|Order Information:||Web: http://www.oup.co.uk/journals|
References listed on IDEAS
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.:
- Alan S. Blinder, 2004. "The Case Against the Case Against Discretionary Fiscal Policy," Working Papers 102, Princeton University, Department of Economics, Center for Economic Policy Studies..
- Tatiana Kirsanova & Mathan Satchi & David Vines & Simon Wren-Lewis, 2007.
"Optimal Fiscal Policy Rules in a Monetary Union,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 39(7), pages 1759-1784, October.
- Tatiana Kirsanova & David Vines & Mathan Satchi & Simon Wren-Lewis, 2005. "Optimal Fiscal Policy Rules in a Monetary Union," Money Macro and Finance (MMF) Research Group Conference 2005 40, Money Macro and Finance Research Group.
- Tatiana Kirsanova & Mathan Satchi & David Vines & Simon Wren-Lewis, 2006. "Optimal Fiscal Policy Rules in a Monetary Union," Discussion Papers 0611, Exeter University, Department of Economics.
- Kirsanova, Tatiana & Satchi, Mathan & Vines, David & Wren-Lewis, Simon, 2006. "Optimal Fiscal Policy Rules in a Monetary Union," CEPR Discussion Papers 5533, C.E.P.R. Discussion Papers.
- Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 703-718, September.
- Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," NBER Working Papers 17240, National Bureau of Economic Research, Inc.
- Knell, Markus & Stiglbauer, Alfred, 2009. "The impact of reference norms on inflation persistence when wages are staggered," Working Paper Series 1047, European Central Bank.
- Markus Knell & Alfred Stiglbauer, 2009. "The Impact of Reference Norms on Inflation Persistence When Wages are Staggered," Working Papers 153, Oesterreichische Nationalbank (Austrian Central Bank).
- Kuralbayeva, Karlygash, 2011. "Inflation persistence and exchange rate regime: Implications for dynamic adjustment to shocks in a small open economy," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 193-205, June.
- Karlygash Kuralbayeva, 2011. "Inflation Persistence and Exchange Rate Regime: Implications for dynamic adjustment to shocks in a small open economy," OxCarre Working Papers 063, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- David Soskice & Torben Iversen, 2000. "The Nonneutrality of Monetary Policy with Large Price or Wage Setters," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 265-284.
- Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-685, September.
- John B. Taylor, 2011. "An Empirical Analysis of the Revival of Fiscal Activism in the 2000s," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 686-702, September.
- John B. Taylor, 2011. "An Empirical Analysis of the Revival of Fiscal Activism in the 2000s," Discussion Papers 10-031, Stanford Institute for Economic Policy Research.
- Roel Beetsma & Massimo Giuliodori, 2010. "The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 603-641, September.
- Beetsma, Roel & Giuliodori, Massimo, 2009. "The Macroeconomic Costs and Benefits of the EMU and other Monetary Unions: An Overview of Recent Research," CEPR Discussion Papers 7500, C.E.P.R. Discussion Papers.
- repec:pri:cepsud:100blinder is not listed on IDEAS
- Christopher Allsopp & David Vines, 2008. "Fiscal Policy, intercountry adjustment and the real exchange rate within Europe," European Economy - Economic Papers 2008 - 2015 344, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- 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.
- Aukrust, Odd, 1970. "PRIM I: A Model of the Price and Income Distribution Mechanism of an Open Economy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 16(1), pages 51-78, March.
- James Cloyne, 2011. "What are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation," CESifo Working Paper Series 3433, CESifo Group Munich. Full references (including those not matched with items on IDEAS)