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Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement?

  • Joerg Bibow

    ()

    (Franklin College, Lugano, Switzerland)

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    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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    File URL: http://www.boeckler.de/pdf/p_imk_studies_01_2006.pdf
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    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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    1. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics 0407026, EconWPA.
    2. Fritz Breuss, . "Macroeconomic Effects of EU Enlargement for Old and New Members," WIFO Working Papers 143, WIFO.
    3. Oya Celasun & R. Gaston Gelos & Alessandro Prati, 2004. "Obstacles to disinflation: what is the role of fiscal expectations?," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 441-481, October.
    4. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
    5. Dyson, Kenneth & Featherstone, Kevin, 1999. "The Road To Maastricht: Negotiating Economic and Monetary Union," OUP Catalogue, Oxford University Press, number 9780198296386, March.
    6. Jörg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Macroeconomics 0103004, EconWPA.
    7. Jörg Bibow, 2001. "Making EMU Work: Some Lessons from the 1990s," Macroeconomics 0103008, EconWPA.
    8. 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, vol. 91(4), pages 589-610, August.
    9. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    10. Buiter, W.H. & Corsetti, G. & Roubini, N., 1992. "Excessive Deficits: Sense and Nonsence in the Treaty of Maastricht," Papers 674, Yale - Economic Growth Center.
    11. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
    12. Jorg Bibow, 2001. "Making EMU Work: Some lessons from the 1990s," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 233-259.
    13. Jorg Bibow, 2005. "Germany in crisis: the unification challenge, macroeconomic policy shocks and traditions, and EMU," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(1), pages 29-50.
    14. Stephen G. Cecchetti & RÛisÌn O'Sullivan, 2003. "The European Central Bank and the Federal Reserve," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 30-43.
    15. Christopher Allsopp & Michael J. Artis, 2003. "The Assessment: EMU, Four Years On," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 1-29.
    16. Jorg Bibow, 2002. "The Markets versus the ECB, and the EURO's Plunge," Eastern Economic Journal, Eastern Economic Association, vol. 28(1), pages 45-57, Winter.
    17. Dexter, Albert S. & Levi, Maurice D. & Nault, Barrie R., 2002. "Sticky prices: the impact of regulation," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 797-821, May.
    18. 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.
    19. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA.
    20. Jorg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Economics Working Paper Archive wp_323, Levy Economics Institute.
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