Monetary Union

The Eurocrisis displays an astonishing similarity to the causes of the Great Depression in the form of massive current account imbalances, destabilising capital flows, financial fragility, and the commitment to defending a fixed exchange rate arrangement by means of austerity and internal devaluation. From the interwar economic and political disaster Europe eventually drew the lesson that internal balance had to enjoy priority over external balance, giving rise to a three-decade long period of unprecedented economic growth after the Second World War. As Europe has again stumbled into many of the policy errors that caused the Great Depression, it will need to relearn some of these lessons. In particular, the paper suggests that Europeanisation has gone too far and that rather than completing the monetary Union, Europe's prosperity and political stability would be better served by compartmentalisation of financial markets, vertical industrial policies and an escape clause in the common currency allowing for temporary exit in case of fundamental disequilibria.

A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard

We quantitatively assess the macroeconomic implications of per- manently reducing the public debt-to-gross domestic product (GDP) ratio in euro area countries. The simulations of a currency union dy- namic general equilibrium model, calibrated to the euro area, give the following results. First, tax distortions are quantitatively signiflcant. Second, the best flscal consolidation strategy is to permanently reduce both expenditures and

We analyze the efiects of flscal policy in a currency area. We de- velop a two-region model having sticky prices, a common monetary authority and regional flscal policies. We break the ricardian equiva- lence and allow for keynesian efiects of public expenditure introducing rule-of-thumb agents in each region. Main results are the following. First, consistently with the empirical evidence, after a public spend- ing shock in one region private agents demand for imports increases and the terms of trade appreciates. Second, a countercyclical flscal rule can restore the Taylor principle and the uniqueness of the equi- librium. Finally, a countercyclical flscal rule contributes to reduce macroeconomic volatility.

Inflation in the European Monetary Union is measured by the Ra.IlJllonised Consumer Price Index (RCP!) and it can be analysed by breaking down the aggregate index in two different ways. One refers to the breakdown into price indexes corresponding to big groups of markets throughout the European countries and another considers the RCP! by countries. The paper shows that both

We simulate the macroeconomic and welfare implications of different fiscal consolidation scenarios in Italy using a medium scale two-areas dynamic general equilibrium currency-union model. Differently from similar models, ours is rich in the terms of fiscal features. We assume distortionary taxes (on labor income, capital income and consumption) and welfare-enhancing public expenditure. We distinguish between public spending on final goods

This paper highlights the factors that limit or increase cyclical divergence in the euro area and reviews one policy area that is important in fostering a speedy adjustment to shocks: the transmission of monetary policy via the housing market. A high interest rate sensitivity of housing markets is beneficial as monetary policy is more powerful in damping cyclical fluctuations overall

This paper compares different nominal anchors in the case of a fixed exchange rate regime for the future single regional currency of the Economic Community of the West African States (ECOWAS). We study the anchor choice when the countries focus the exchange rate policy to promote internal and external competitiveness. We consider four foreign anchor currencies: the us dollar, the euro, the yen and the yuan. Using a counterfactual analysis, we find little support for a dominant peg in the ECOWAS zone. In attempting to select an anchor currency, as regards internal and external competitiveness, several aspects need to be taken into consideration: the variability of the commodity prices, adverse downward trend movements, the stability of export revenues and the invoicing currency. A discriminating element is the direction toward which the anchor currency moves, while the world price of commodities evolves in the opposite direction. Our simulations show that the countries would not agre...