LIUC
The European Journal of Comparative Economics
ISSN: 1824-2979
LIUC
EJCE
Year: 2005, June. Volume: 2 - Issue: 1

European Economic Policies at Work : the costs of Price Stability and Budget Consolidation

Carlo Altavilla ; Ugo Marani

PDF file View this article

Start page: 111 - End page: 136

Keywords:
Monetary and Fiscal Strategy; ECB; EMU
Abstract:
The paper investigates whether the policy framework adopted by the EMU participating countries might create recessive tendencies. First, we check the existence of a deflationary bias by separately analysing monetary and fiscal policy. The analysis of monetary policy focuses on a backward- and a forward-looking monetary rule. The reaction functions are estimated to capture the criteria that a centralized monetary authority should use in setting short-term interest rate. Second, a comparative analysis is made of the ability of different central banks to stabilize output and inflation. Precisely, we compare the strategy followed by the European Central Bank, the Deutsche Bundesbank and the US Federal Reserve. Then, a measure of fiscal bias is retrieved by estimating the impact that a change in the primary surplus to GDP ratio has on the real economy. Finally, we search for a quantitative assessment of the recessive propensity of the European economic policies by estimating an overall policy bias. The results suggest the EU institutional set-up might create and/or amplify the recessive tendencies. The policy constraints the EMU members face were dreamt when the Community was struggling with an inflationary legacy. The danger nowadays is not inflation but rather its opposite, deflation. As a consequence, the EU institutions need to be at least partially reformed

Jel code: C52
Jel code: E52
In case of problems please write an e-mail to secretariat.ejce@liuc.it
Supplemento a LIUC Papers
Direttore Responsabile: Piero Cavaleri
UniversitÓ Carlo Cattaneo - LIUC
C.so Matteotti, 22
21053 Castellanza (Va) - Italia
Registro stampa Tribunale di Busto Arsizio n. 11/93 del 11.06.93