Daniel Gros

Estimating the costs and benefits of EMU: The impact of external shocks on labour markets

Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets. — Discussions of costs and benefits of EMU usually rely on the optimum currency area approach: when external shocks hit the economy, it is easier to adjust the exchange rate than domestic prices or wages. We find that external shocks have little impact on unemployment, but are more important to manufacturing employment. Taking into account potential shock absorbers (exchange rates, fiscal and monetary policy) leaves results unchanged. By contrast, internal shocks, strongly influence (un)employment. The loss of the exchange rate instrument will not lead to massive unemployment after external shocks.ZusammenfassungSchätzung von Kosten und Nutzen aus der EWU. Die Auswirkung externer Schocks auf Arbeitsmärkte. — Diskussionen über Kosten und Nutzen der EWU beruhen gewöhnlich auf dem Ansatz des optimalen Währungsraumes. Wenn eine Volkswirtschaft von externen Schocks betroffen wird, ist es einfacher, den Wechselkurs anzupassen als die heimischen Preise und Löhne. Die Verfasser finden heraus, daβ externe Schocks wenig Einfluβ auf die Arbeitslosigkeit haben, aber wichtiger für die Beschäftigung in der Industrie sind. Berücksichtigt man potentielle Schockdämpfer (Wechselkurse, Fiskal- und Geldpolitik), bleiben die Ergebnisse unverändert. Dagegen beeinflussen interne Schocks die Beschäftigung (Arbeitslosigkeit) erheblich. Der Verlust des Instruments der Wechselkurse wird nach externen Schocks nicht zu massiver Arbeitslosigkeit führen.

On the volatility of exchange rates: Tests of monetary and portfolio balance models of exchange rate determination

ZusammenfassungZu den Schwankungen von Wechselkursen: Tests von monetÄren und Portfolio-Modellen der Wechselkursbestimmung. - Anhand einer Methodologie, die aus der Literatur des Finanzwesens übernommen wurde, wird in diesem Aufsatz getestet, ob die beobachteten Schwankungen der Wechselkurse durch die beobachteten Schwankungen der Determinanten erklÄrt werden können. GemÄ den monetÄren und Portfolio-Modellen sind diese Determinanten: Geldversorgung, Einkommen, Unterschiede in den Inflationsraten und Angebot von Vermögenstiteln. Die Ergebnisse scheinen unabhÄngig davon zu sein, welches Modell benutzt wird. Sie zeigen, da die VerÄnderungen der Wechselkurse innerhalb des EWS mit Hilfe von VerÄnderungen der Determinanten erklÄrt werden können, da aber die VerÄnderlich-keit anderer Wechselkurse (USS/DM, Yen/DM, sfr/DM) viel gröer ist, als aufgrund der Schwankungen der Determinanten zu erwarten wÄre.RésuméSur la volatilité des taux de change: tests des modèles monétaires et de portefeuille de la détermination du taux de change. - L’auteur applique une méthodologie dérivée de la littérature des finances pour tester si la variabilité observée des taux de change peut Être expliquée par la variabilité des facteurs fondamentaux. Les modèles monétaires et de portefeuille suggèrent des variables fondamentales suivantes: masse monétaire, revenu national, différence en inflation et l’offre des valeurs actives. Les résultats semblent Être indépendants du modèle appliqué. Ils indiquent que la variabilité des taux de change intra-SME peut Être expliquée en terme des variables fondamentales, mais la variabilité des autres taux de change (US

Instability of the Eurozone? On Monetary Policy, House Prices and Structural Reforms

/DM, Yen/DM, Swiss Frank/DM) est plus grande qu’on pourrait l’expliquer par des telles variables.ResumenSobre el test de volatilidad de tipos de cambio aplicado a modelos monetarios y de “portfolio balance” de determinación del tipo de cambio. - En este trabajo se utiliza una metodología tomada de la literatura financiera para determinar empíricamente si la variabilidad observada de las tasas de cambio puede explicarse con la variabilidad observada en las variables fundamentales. De acuerdo a los modelos monetarios y de “portfolio balance” las variables fundamentales son: la oferta monetaria, el ingreso, la diferencia entre las tasas de inflación y la oferta de activos. Los resultados parecen ser independientes del tipo de modelo utilizado. Ellos indican que la variabilidad de los tipos de cambio del Sistema Monetario Europeo puede explicarse en términos de las variables fundamentales, mas la variabilidad de otros tipos de cambio (US

Effects of European Monetary Integration on Unemployment: How Costly Was (Intra-European) Exchange Rate Variability?

/DM, Yen/DM, Franco Suizo/DM) es más alta que la de las variables fundamentales.

The Trade-Off between Fiscal and Competitiveness Adjustments

This paper deals with potential instabilities in the Eurozone stemming from an insufficient interplay between monetary policy and reform effort on the one hand and the emergence of intra-Euro area divergences on the other hand. As a first step, we assess the effect of European Monetary Union (EMU) on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions, which prevailed until some months ago, can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst (e.g., when housing prices stop rising) this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation.

Evidence on the Costs of Intra-European Exchange Rate Variability

Eliminating intra-European exchange rate variability is often portrayed as one major advantage of EMU (reducing it was already a goal of the creation of the EMS in 1979). But why should politicians and economists care about exchange rate variability? Up to now the answer has usually been that exchange rate variability discourages trade. Unfortunately, a large empirical literature on this issue has not been able to document a strong link between exchange rate variability and the volume of trade. However, we would argue that the absence of a strong impact of exchange rate variability on the volume of trade does not imply that there should be no link between exchange rate variability and (un-) employment and investment. This becomes clear once one asks the question: why would an increase in exchange rate volatility lead quickly to a lower volume (flow) of trade? The theoretical models that are used in this context start typically from the idea that in order to export one needs to sustain a sunk cost. This sunk cost is meant to represent the need to build up a distribution system in foreign markets. But within Europe most firms already have a very elaborate distribution network in all member countries. A German automobile manufacturer will typically not have to build up a new distribution system in order to increase sales in other European countries. Hence we would argue that certainly for intra-European trade (the focus of our empirical work) market access costs cannot be the main reason why exchange rate volatility should affect trade.

The "Relative" Importance of EMU Macroeconomic Imbalances in the Macroeconomic Imbalance Procedure

A centrepiece of the new economic governance structure for the euro area is the so-called European Semester, whose first cycle closes each year in early July with the endorsement of the country-specific recommendations (CSRs) by the European Council. Member state governments are then expected to implement such recommendations into budgetary decisions, structural reforms and employment policies. The recommendations are formulated on the basis of specific challenges previously identified by the Commission in the framework of the annual growth survey (budget and structural challenges) as well as within the macroeconomic imbalances procedure and after hearings of the European Parliament opinion.