A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area
This paper examines the mechanism of persistent inflation differentials, current account imbalances, and fiscal deficits in the euro area by constructing a multi-country model in which the optimization behaviors of governments as well as those of households, firms, and the European Central Bank are explicitly incorporated. The model indicates that governments can temporarily adhere to their own intrinsic preferences because fiscal policies are not unified in the euro area. This behavior generates problems, such as inflation differentials, and the stability and growth pact does not appear to be sufficiently effective in preventing such deviations. The results in this paper imply that the balance between national sovereignty and economic stability should be shifted more to the side of stability and that the euro area has to become more politically unified. In addition, the inflation differentials provide clear evidence that inflation acceleration is not caused by monetary policies but by government behavior because monetary policies are unified in the euro area whereas fiscal policies are not.
|Date of creation:||18 Jan 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- repec:zbw:rwirep:0176 is not listed on IDEAS
- Patrick Honohan & Philip R. Lane, 2003. "Divergent inflation rates in EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 357-394, October.
- Florence Jaumotte & Piyaporn Sodsriwiboon, 2010. "Current Account Imbalances in the Southern Euro Area," IMF Working Papers 10/139, International Monetary Fund.
- Harashima, Taiji, 2009. "A Theory of Total Factor Productivity and the Convergence Hypothesis: Workers’ Innovations as an Essential Element," MPRA Paper 15508, University Library of Munich, Germany.
- Alberto Alesina & Allan Drazen, 1989.
"Why are Stabilizations Delayed?,"
NBER Working Papers
3053, National Bureau of Economic Research, Inc.
- JÃ¶rg Decressin & Emil Stavrev, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund.
- Samuelson, Paul A, 1994. "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 201-26, October.
- Philip R. Lane, & Patrick Honohan, 2003.
"Divergent Inflation Rates in EMU,"
The Institute for International Integration Studies Discussion Paper Series
- Luigi Ventura, 2003. "Direct Measures of Time Preference," The Economic and Social Review, Economic and Social Studies, vol. 34(3), pages 293–310.
- Harashima, Taiji, 2010. "Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population," MPRA Paper 22521, University Library of Munich, Germany.
- Zemanek, Holger & Belke, Ansgar & Schnabl, Gunther, 2010.
"Current Account Balances and Structural Adjustment in the Euro Area,"
Ruhr Economic Papers
176, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
- Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2010. "Current account balances and structural adjustment in the euro area," International Economics and Economic Policy, Springer, vol. 7(1), pages 83-127, May.
- Dubravko Mihaljek & Marc Klau, 2008. "Catching-up and inflation in transition economies: the Balassa-Samuelson effect revisited," BIS Working Papers 270, Bank for International Settlements.
- N. Holinski & C.J.M. Kool & J. Muysken, 2010.
"Origins of persistent macroeconomic imbalances in the Euro area,"
10-12, Utrecht School of Economics.
- Holinski Nils & Kool Clemens & Muysken Joan, 2010. "Origins of persistent macroeconomic imbalances in the Euro area," Research Memorandum 026, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
- Edward C. Prescott, 1997.
"Needed: a theory of total factor productivity,"
242, Federal Reserve Bank of Minneapolis.
- Karras, Georgios, 1994. "Macroeconomic effects of budget deficits: further international evidence," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 190-210, April.
- Filippo Altissimo & Pierpaolo Benigno & Diego Rodriguez Palenzuela, 2005.
"Long-Run Determinants of Inflation Differentials in a Monetary Union,"
NBER Working Papers
11473, National Bureau of Economic Research, Inc.
- Altissimo, Filippo & Benigno, Pierpaolo & Rodriguez Palenzuela, Diego, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," CEPR Discussion Papers 5149, C.E.P.R. Discussion Papers.
- Edwards, Jeremy & Keen, Michael, 1996.
"Tax competition and Leviathan,"
European Economic Review,
Elsevier, vol. 40(1), pages 113-134, January.
- Andrew A. Samwick, 1997.
"Discount Rate Heterogeneity and Social Security Reform,"
NBER Working Papers
6219, National Bureau of Economic Research, Inc.
- Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
- Paul M Romer, 1999.
"Increasing Returns and Long-Run Growth,"
Levine's Working Paper Archive
2232, David K. Levine.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
- 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.
- Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
- Alberto Alesina & Alex Cukierman, 1990.
"The Politics of Ambiguity,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 105(4), pages 829-850.
- R. Fendel & M. Frenkel, 2009. "Inflation differentials in the Euro area: did the ECB care?," Applied Economics, Taylor & Francis Journals, vol. 41(10), pages 1293-1302.
- Angeloni, Ignazio & Ehrmann, Michael, 2004.
"Euro area inflation differentials,"
Working Paper Series
0388, European Central Bank.
- Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, vol. 16(3), pages 403-419, June.
- 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.
- Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002.
"Modern Hyper- and High Inflations,"
NBER Working Papers
8930, National Bureau of Economic Research, Inc.
- Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
- Harashima, Taiji, 2006. "The Sustainability of Budget Deficits in an Inflationary Economy," MPRA Paper 905, University Library of Munich, Germany.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:28121. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.