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How do European monetary and fiscal authorities behave?

  • Carlo A. Favero

The objective of this study is to investigate the behaviour of monetary and fiscal authorities in the Euro area. Our main contribution is joint modelling of behaviour of the two authorities. Our investigation highlights a number of facts. The systematic monetary policies adopted by the non-German authorities in the seventies were not capable of stabilizing inflation. Such results have been achieved in the eigthies and the nineties by anchoring more tightly domestic monetary policy to German monetary policy. All the main episodes of expansionary fiscal policy occurred in the course of the eigthies and the nineties in Europe cannot be explained by the sytematic behaviour of fiscal authorities. Stabilization of inflation has been achieved independently from the lack of fiscal discipline. There are important interactions between the two authorities but they depend exclusively on the responses of governemnts expenditures and receipts to interest rate payments on the public debt. Data on IT spending and investment unambiguously show that the European Union as a whole has eventually caught up with the United States in recent years. Throughout 1992-2001, two thirds of the EU population reached - or came much closer to - the same levels of IT diffusion as the United States. The remaining thirdof the EU citizens clusters together in a group of ´slow IT adopters´ (inclusive of Ireland, Italy, Spain, Portugal and Greece), whose distance from the US and the other EU countries in IT diffusion has evenwidened over time. In spite of this (partial) catching-up in IT diffusion, information technologies have so far delivered limited overall productivity gains in Europe. Thinking of European economies as new economies is thus not appropriate yet.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 214.

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Handle: RePEc:igi:igierp:214
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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  2. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
  3. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
  4. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  6. Clarida, R. & Gertler, M., 1996. "How the Bundesbank Conducts Monetary Policy," Working Papers 96-14, C.V. Starr Center for Applied Economics, New York University.
  7. 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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