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Divergences in the Euro Area: a Cause for Concern?

  • Björkstén, Nils
  • Syrjänen, Miika

    ()

    (Bank of Finland)

Registered author(s):

    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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    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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    1. 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.
    2. Enrique Alberola-Ila & Tymo Tyrväinen, 1998. "Is there Scope for Inflation Differentials in EMU? An Empirical Evaluation of the Balassa-Samuelson Model in EMU Countries," Banco de Espa�a Working Papers 9823, Banco de Espa�a.
    3. Tyrväinen, Timo, 1998. "What Do We Know about Productivity Gaps and Convergence in EMU Economies?," Research Discussion Papers 31/1998, Bank of Finland.
    4. 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.
    5. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
    6. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics 20226, London School of Economics and Political Science, LSE Library.
    7. 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.
    8. 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.
    9. 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.
    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. 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.
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