Karen Dury

Asymmetric Labour Markets in a Converging Europe: Do Differences Matter?

Asymmetric economic structures across Europe may result in common shocks having asymmetric effects. In this paper we investigate whether the differences in the structure and dynamics that we observe in the European economies matter for policy design. In particular it is widely believed that labour market responses are different, with the structure of labour demand and the nature of the bargain over wages differing between countries. In addition the European economies move at different speeds in response to common shocks. In this paper we construct three different models of Europe, one where the labour market relationships are separately estimated and assumed to be different, one where the most statistically acceptable commonalties are imposed and one where common labour market relationships are imposed across all member countries. We use panel estimation techniques to test for the imposition of commonalties among countries. We find that it is possible to divide Europe into sub-groups, but it is not possible to have one model of European labour markets. We use stochastic simulation techniques on these different models of Europe and find that the preferred rule for the ECB is a combined nominal aggregate and inflation-targeting rule. We find that while this rule is dominant in all our models, the more inertia that is introduced into the labour markets, the more a nominal aggregate-targeting rule alone may be preferred. However, we conclude, that differences in the labour market transmission mechanisms across the European countries appear to have little influence on the setting of monetary policy for the ECB, although this depends on the relative importance of the different components in the welfare loss function.

Will the SGP Ever Be Breached

The European Union economies have embarked on a programme of economic transformation that changes their mode of governance. Rules for monetary policy-making have been fundamentally altered for euro area members and all fifteen are variously bound by Treaty or Protocol to fiscal programmes that have significant implications for the flexibility with which they operate stabilisation policy. The Stability and Growth Pact (SGP) puts clear limits on the size of deficits that can be run, and has a rather loose system of fines associated with it. In this chapter we focus on the likelihood of member countries breaching this criteria and the extent to which changes in monetary policy affect this outcome. In particular we investigate what effects different types of simple monetary policy rules have on a country’s ability to keep within the SGP criteria. One of the most common criticisms of the SGP is that it may be too binding in that governments will be unable to use fiscal stabilisation policies. This chapter throws light on the scope for fiscal activism in stabilising individual EMU economies.

The implications of diversity in consumption behaviour for the choice of monetary policy rules in Europe

Abstract Differences in economic structures across countries have potentially important implications for the conduct of monetary policy in the Euro Area. One facet of this lies in consumer expenditure behaviour. Our objective is to analyse the policy implications of assuming maximal and minimal differences between European economies using the National Institutes Global Econometric Model. We assess the performance of three possible ECB monetary policy rules under these different scenarios, using measures of the volatility of prices and output. We take as our benchmark a fully heterogeneous Europe, where individual country consumption functions are estimated separately. We estimate a homogeneous model for core European countries, incorporating countries into the core where it is statistically justified to pool them. We also estimate a fully homogeneous Europe where all Euro Zone countries are pooled. We find that the two ‘pillar strategy’ adopted by the ECB dominates other monetary policy frameworks.

Fiscal policy in EMU: simulating the operation of the Stability Pact

We study the prospective operation of the Stability Pact by stochastic simulation. Using a forward-looking multi-country macroeconometric model, NiGEM, comprising individual blocks for 10 Euroland economies, the Pacts provisions are formalized in detail, and alternative monetary and fiscal rules are compared.

International monetary policy coordination: an evaluation using a large econometric model

Abstract We examine whether there is a case for coordinating monetary policy reactions across major economies. We undertake stochastic simulations on the National Institutes Global Econometric Model (NiGEM), to evaluate independently set monetary policy where domestic considerations remain the prime objective and we compare outcomes to a regime with a coordinated policy where domestic interest rates react to international conditions. We also demonstrate the asymptotic properties of the stochastic simulations and stress the robustness of our results.

Financial market contagion and the effects of the crises in East Asia, Russia and Latin America

ialised economies. There were also important downside risks in our forecasts at that time; in particular the danger that a policy of monetisation in Japan would further weaken the yen and set in motion renewed disruption by enforcing a devaluation of the Chinese yuan against the dollar. It was also clear that profit margins were coming under pressure in the US economy, raising the possibility that future dividends would be somewhat weaker than

The Real Exchange Rate and Quality Improvements

This paper studies how the real exchange rate might respond to product innovation (improvements in the quality of goods) as opposed to process innovation (increased efficiency in the production of goods). We develop a two-country dynamic stochastic general equilibrium model, where quality improvements affect both the demand and the supply side of the economy. We show that the real exchange rate defined in terms of prices per quality unit (quality-adjusted prices) does not always move in the same direction as that defined in terms unit prices (quality-unadjusted prices), illustrating the importance of measuring quality correctly.