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Strong exports and low interest rates drive Euroland's economy

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  • Gern, Klaus-Jürgen
  • Meier, Carsten-Patrick
  • Scheide, Joachim
  • Schlie, Markus

Abstract

In the fall of 1999, the recovery in Euroland is back on track. The turnaround was caused by the improvement in the world economy. After exports had been depressed in the past winter due to the weak demand in the crisis countries particularly in Asia, the impulses from abroad have picked up again. Furthermore, monetary policy has been expansionary, especially after the reduction of key interest rates in April this year. All in all, the upswing will gain momentum and will continue in the year 2000. In this paper, rules for monetary policy which are being discussed in the literature are used to gauge the stance of monetary policy. The conclusion is that interest rates will have to be raised if the reference path for money shall not be exceeded and if the target for inflation shall be achieved. Furthermore, the differences in growth rates of output across Euroland's economies are analyzed; it is found that there has been no significant convergence of income levels during the past decade. Finally, it is analyzed why inflation rates have differed in recent years. The main reason appears to be that the prices for nontradables in the various countries show different rates of change over time. Since such differences can also be expected for the future, inflation rates will not be equal, i.e., there will also be changes in real exchange rates in the monetary union. However, there is no reason for monetary policy to be concerned about this.

Suggested Citation

  • Gern, Klaus-Jürgen & Meier, Carsten-Patrick & Scheide, Joachim & Schlie, Markus, 1999. "Strong exports and low interest rates drive Euroland's economy," Kiel Discussion Papers 353, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkdp:353
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    References listed on IDEAS

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