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482. Inflation Persistence and Optimal Monetary Policy in the Euro Area
- Author:
- Pierpaolo Benigno and J. David Lopez-Salido
- Publication Date:
- 12-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In this paper we first present supporting evidence of the existence of heterogeneity in inflation dynamics across euro area countries. Based on the estimation of New Phillips Curves for five major countries of the euro area, we find that there is significant inertial (backward looking) behavior in inflation in four of them, while inflation in Germany has a dominant forward looking component. In the second part of the paper we present an optimizing agent model for the euro area emphasizing the heterogeneity in inflation persistence across regions. Allowing for such a backward looking component will affect the evaluation of the degree of nominal rigidities relevant for the monetary policy design. We explore the welfare implications of this circumstance by comparing the adjustment of the economies and the area as a whole in response to terms-of-trade shocks under four monetary policy rules: fully optimal, optimal inflation targeting, HICP targeting and output gap stabilization.
- Topic:
- Development, Economics, and International Trade and Finance
- Political Geography:
- Europe
483. The Road to Adopting the Euro: Monetary Policy and Exchange Rate Regimes in EU Candidate Countries
- Author:
- Fabio M. Natalucci and Federico Ravenna
- Publication Date:
- 12-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper examines the choice of exchange rate regime in EU candidate countries during the process of accession to the European Monetary Union (EMU). In the presence of real exchange rate appreciation due to the Balassa-Samuelson effect, candidate countries face a trade-off between trend appreciation of the nominal exchange rate and high inflation rates. In a general equilibrium model of an emerging market economy, we show that under a fixed or heavily managed exchange rate the Balassa-Samuelson effect might prevent compliance with the Maastricht inflation criterion, unless a contractionary policy is adopted. We then discuss how the real exchange rate appreciation shifts the output gap/inflation variance trade-off, increasing the cost of managing or fixing the exchange rate. As a consequence, the requirement of membership in the Exchange Rate Mechanism (ERM-II) and the Maastricht inflation criterion constrain the policy choice while providing no additional benefit to countries credibly committed to joining the Euro. Finally, we show that relaxing either the exchange rate requirement or the inflation criterion has sharply different business cycle implications for the accession countries.
- Topic:
- Economics, Emerging Markets, and International Trade and Finance
- Political Geography:
- Europe
484. Monetary Union, Price Level Convergence, and Inflation: How Close is Europe to the United States?
- Author:
- John H. Rogers
- Publication Date:
- 10-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In light of 50 years of economic policies designed to integrate Europe -- culminating in the elimination of euro zone national currencies in early 2002 -- and a vast academic literature on international economic integration, it is of interest to assess how far European integration has come in practice. Using a unique data set, I document the pattern of price dispersion across European and U.S. cities from 1990 to 2001. I find a striking decline in dispersion for traded goods prices in Europe, most of which took place between 1991 and 1994. The level of traded goods price dispersion in the euro area is now quite close to that of the United States. A decline in dispersion of non-tradeables prices in Europe has also taken place, but to a smaller extent. For U.S. cities, there is no evidence of a decline in price dispersion, even for tradeables. I examine several possible explanations for the decline in European price dispersion, including harmonization of tax rates, convergence of incomes and labor costs, liberalization of trade and factor markets, and increased coherence of monetary policy. I also investigate how much of the variation in national inflation rates in Europe can be explained by price level convergence. Finally, after showing that prices in likely next-round entrants into the euro zone are well below prices in Western Europe, I discuss the potential inflationary consequences of accession into monetary union for Eastern Europe.
- Topic:
- Economics and International Trade and Finance
- Political Geography:
- United States and Europe
485. Equity Prices, Household Wealth, and Consumption Growth in Foreign Industrial Countries: Wealth Effects in the 1990s
- Author:
- Carol C. Bertaut
- Publication Date:
- 04-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Although most recent empirical research regarding the size and significance of the impact of changes in wealth on consumption has looked for such effects in the United States, equity prices in the 1990s rose considerably in most other industrial countries as well. This paper investigates the strength of the wealth effect across countries. Using a variety of methods, I find evidence of significant wealth effects in the United Kingdom and Canada of a size comparable to that in the United States, reflecting the importance of equities in aggregate household wealth in these countries. A significant wealth effect is also evident in Japan, but because household wealth has changed little on balance in Japan in recent years, this channel has been less important in explaining Japanese consumption growth in the second half of the 1990s. Despite a rapid appreciation in equity prices and an increase in equity ownership in the major continental European countries since 1995, equities remain a less important form of household wealth in most of these countries, and the consumption response to changes in wealth remains limited. However, in some smaller European countries where equity issuance is more common, the emerging evidence suggests that wealth effects may be more important.
- Topic:
- International Relations, Economics, Globalization, and International Trade and Finance
- Political Geography:
- United States, United Kingdom, Europe, and Canada
486. International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?
- Author:
- Joseph E. Gagnon, Dale W. Henderson, Brian M. Doyle, and Laurence H. Meyer
- Publication Date:
- 04-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In this paper we provide two building blocks for an analysis of international policy coordination: (1) a survey of models of policy coordination, and (2) an account of experience with policy coordination among the G-7 countries and within Europe since the breakdown of the Bretton Woods System. Using these building blocks, we investigate the correspondence between the models and experience and attempt to draw lessons for both the modelers and the practitioners. We find that the correspondence is close enough that the models help in analyzing several instances of actual policy coordination, but that the correspondence could be even closer. As for lessons for modelers, we suggest that they devote more attention to the analysis of information exchange, a key feature of practical policy coordination; to the coordination of different types of policies; to the ramifications of political divisions within countries; and to the implications of market irrationality and speculative bubbles. As for lessons for policy makers, we suggest that they give more consideration to the choice of their ultimate objectives, in particular to whether the current account should always be close to balance; to achieving better internal policies; and to the greater use of fiscal policy as a stabilization tool.
- Topic:
- International Relations, Economics, Globalization, and International Trade and Finance
- Political Geography:
- Europe
487. Regional Influences on U.S. Monetary Policy: Some Implications for Europe
- Author:
- Ellen E. Meade and D. Nathan Sheets
- Publication Date:
- 02-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper looks at the monetary policy decisions of the U.S. Federal Reserve and asks whether those decisions have been influenced solely by national concerns, or whether regional factors have played a role. All of the Federal Reserve's policymakers have some regional identity, i.e., either their positions explicitly carry some regional affiliation or their region of origin is a factor that must be considered in the selection process. This research is relevant for the Fed, and it may also be relevant for Europe's fledgling central bank in Frankfurt. Critics have asserted that ECB policymakers have an incentive to base policy on national developments and respond to national political pressures. We find that Fed policymakers do take into account developments in regional unemployment when deciding monetary policy, and that these regional developments are more important for central bankers at the hub than in the spokes. These findings are robust to a variety of different specifications of the voting equation.
- Topic:
- Economics and International Trade and Finance
- Political Geography:
- United States and Europe
488. International — Auto Consolidation
- Publication Date:
- 06-2002
- Content Type:
- Policy Brief
- Institution:
- Oxford Analytica
- Abstract:
- Fiat announced a sharp fall in May car sales in Italy on June 5 and its debt is under review for a possible ratings downgrade. The world's sixth-largest car maker is one of many manufacturers facing difficult profitability conditions. Global sales volumes in the industry have remained high, but profits have not followed suit. Mergers, the most rational panacea, are confounded by bitter experience.
- Topic:
- Economics, Industrial Policy, and International Trade and Finance
- Political Geography:
- United States and Europe
489. International — Weak Dollar
- Publication Date:
- 05-2002
- Content Type:
- Policy Brief
- Institution:
- Oxford Analytica
- Abstract:
- This week's piece is on the international implications of a weaker US dollar. Seventeen weeks of dollar weakness raise the questions of whether the dollar is on a sustained path of decline, and what the implications are internationally. The 6% nominal effective decline in the dollar since January 31 might be sustained due to US financial and macroeconomic factors. Overall, the effect would be positive for Europe and the United States, and might encourage domestic demand growth in export-oriented Asian economies.
- Topic:
- Economics and International Trade and Finance
- Political Geography:
- United States and Europe
490. European Union — FSAP Progress
- Publication Date:
- 04-2002
- Content Type:
- Policy Brief
- Institution:
- Oxford Analytica
- Abstract:
- This week's piece is on the progress towards completing the Financial Services Action Plan (FSAP). Amid continuing difficulties in key areas, pressure is growing for further advances in completing the single market for capital and financial services.
- Topic:
- International Political Economy and International Trade and Finance
- Political Geography:
- Europe