Prelims

Rosaria Rita Canale (Parthenope University of Naples, Italy)

Rajmund Mirdala (Technical University of Košice, Slovakia)

Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence

ISBN: 978-1-78754-126-9, eISBN: 978-1-78743-793-7

Publication date: 13 May 2019

pdf (1.3 MB) ePub (696 KB)

Citation

Canale, R.R. and Mirdala, R. (2019), "Prelims", Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence, Emerald Publishing Limited, Leeds, pp. i-xiii. https://doi.org/10.1108/978-1-78743-793-720191005

Publisher

:

Emerald Publishing Limited

Half Title Page

Fiscal and Monetary Policy in the Eurozone

Series Page

Praise for Fiscal and Monetary Policy in the Eurozone

“Canale and Mirdala guide us through the world of policy and modeling explanations concerning developments in the Eurozone…. This well-written book provides coverage of a number of important issues and techniques treated in a refined didactic manner.”

– Julius Horvath, Central European University, Hungary

“This book is useful both for readers interested in the euro area and those interested in the theoretical foundations of economic policies. This double perspective is rarely present in a single book.”

– Jean-Pierre Allegret, Full Professor of Economics, Head of GREDEG, CNRS and University Nice Sophia Antipolis, France

“(This book) addresses the needs of the Eurozone for alternative and pragmatic approaches to theoretical inquiry and policy making in a manner not typically found in other publications.”

– Nikolaos Karagiannis, Winston-Salem State University, USA

“This book is an important contribution to the discussion of the most advances regional integration project on the planet.”

– Martina Metzger, Berlin School of Economics and Law, Germany

“This book will be of much interest to students, scholars, and policy makers interested in understanding the fundamental origins of the euro-area crisis.”

– Sergio Rossi, University of Fribourg, Switzerland

“Fiscal and Monetary Policy in the Eurozone by Rorita Canale and Rajmund Mirdala is an in-depth and useful text…. The book represents a valuable contribution to the analysis and the economic policy debate regarding the Eurozone.”

– Daniele Schiliro, University of Messina, Italy

“Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence provides a complete and lucid narrative of the fiscal and monetary policy in the Eurozone.”

– Yaya Sissoko, Indiana University of Pennsylvania, USA

Title Page

Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence

by

Rosaria Rita Canale

Parthenope University of Naples, Italy

and

Rajmund Mirdala

Technical University of Košice, Slovakia

United Kingdom – North America – Japan India – Malaysia – China

Copyright Page

Emerald Publishing Limited

Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2019

Reprints and permissions service

Contact: permissions@emeraldinsight.com

No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-1-78754-126-9 (Print)

ISBN: 978-1-78743-793-7 (Online)

ISBN: 978-1-78743-981-8 (Epub)

List of Figures, Tables			ix
Preface			xi
Acknowledgements			xiii
Introduction			1
Chapter 1	The Policy Framework in the Eurozone	5
	1.1. The European Monetary Union: Historical Roots and Recent Events	5
	Box 1.1 The Optimal Currency Area Theory	9
	1.2. Policy Principles from World War II to the Fall of Bretton Woods	12
	Box 1.2 Fiscal and Monetary Policy Under Alternative Exchange Rates Regimes and Perfect Capital Mobility: The Mundell–Fleming Model	17
	1.3. From the Exchange Rate Agreements to the Common Currency: The Policy Model of the New Consensus Macroeconomics	22
	1.4. The Present Policy Framework of the Eurozone	27
Chapter 2	Fiscal Policy in the Eurozone	31
	2.1. From Keynesian Macroeconomics to Contemporary Theory	31
	2.2. Fiscal Policy Theory in a Keynesian World	32
	Box 2.1 Inflation and Output Effects of Expansionary Fiscal Policies: The Slope of the Supply Curve	35
	Box.2.2 Fiscal Policy Rules in the Eurozone	37
	2.3. Fiscal Policy and the Intertemporal Approach	40
	2.4 .The Evolution of the Theoretical Debate and the Case of the Eurozone	44
	2.5. The Empirical Literature	49
	2.6. The Issue of Public Debt and the Need to Implement Structural Public Balance Adjustments	54
	Box 2.3 The Crowding-out Effect in a Monetary Union	59
Chapter 3	Monetary Policy in the Eurozone	65
	3.1. Theoretical Basis of the Monetary Policy Conduction	65
	3.1.1. Phillips Curve a NAIRU	65
	3.1.2. The Relationship between Inflation and Economic Growth	71
	3.1.3. Sources of Inflation	72
	Box 3.1 Specific Approaches to Inflation	76
	3.1.4. Effects of Reducing Inflation	79
	3.1.5. Selected Approaches to Deflation	82
	3.1.6. Exchange Rate and Inflation Relationship	84
	3.1.7. Consequences of Exchange Rate Fluctuations	85
	3.1.8. Real Exchange Rate	86
	3.2. Conduction of Monetary Policy and its Macroeconomic Aspects	91
	3.2.1. The Importance of the Nominal Anchor in the Conduction of Monetary Policy	94
	Box 3.2 Fixed Versus Flexible Exchange Rate Dilemma (Evidence from New EU Member Countries)	98
	Box 3.3 Evolution of Exchange Rate Regimes in the European Transition Economies	101
	Box 3.4 Monetary Policy and the Exchange Rate System	112
	3.2.2. Transmission Mechanism of Monetary Policy	114
	3.2.3. The Importance of the Operational Criterion in the Transmission Mechanism of Monetary Policy	117
	Box 3.5 Impact of Quantitative and Qualitative Approach to the Monetary Policy Conduction on Central Bank’s Balance Sheet	122
	3.2.4. Choice between Inflation and Price Targeting	125
	3.3. Evolution of the ECB’s Monetary Policy	126
	3.3.1. First Phase: Monetary Policy Beginning and Adjustment (1999–2003)	128
	3.3.2. Second Phase: Monetary Policy Until the Financial Crisis (2003–2007)	131
	3.3.3. Third Phase: Global Financial Crisis and Great Recession (2008–2013)	132
	3.3.4. Fourth Phase: Ultra-low Inflation and QE (2014 to the Present)	134
	Box 3.6 Overview of the Instruments Employed via a Broad Policy of Liquidity Provision to the Banking Sector Employed by ECB (2018)	135
	3.4. Monetary Policy Controversies	137
	3.4.1. Qualitative and Quantitative Approach to the Monetary Policy Conduction	137
	3.4.2. Rules Versus Discretion	140
	3.4.3. Taylor Rule	143
	3.5. Monetary Policy in DSGE Model	146
Chapter 4	Policy Coordination in the Eurozone	153
	4.1. Policy Coordination in the Eurozone: A General Framework	153
	Box 4.1. International Spillover Effects under Floating Exchange Rate Regimes	155
	4.2. Fiscal Policy, Monetary Policy, and Financial Markets: A Stylized Model for A Country Belonging to The Eurozone	158
	4.2.1. National Government Behavior	159
	4.2.2. Financial Market Behavior	161
	4.2.3. A Graphical Representation	161
	4.2.4. Case 1. Sustainable Shocks	162
	4.2.5. Case 2. Unsustainable Shocks	162
	4.3. Policy Coordination and External Equilibrium	165
	4.4. Policy Coordination and the Future of the Eurozone	170
	Box 4.2 Unpleasant Effects of Restrictive Fiscal Measures in the Eurozone	172
Conclusions			177
References			181
Index			195

List of Figures, Tables

Figures

Fig. 1.1	Effects of an Asymmetric Shock in Two Different Countries Belonging to a Monetary Union.	10
Fig. 1.2	Automatic Rebalancing through Wage Flexibility or Labor Mobility of an Asymmetric Shock	11
Fig. 1.3	Policy Instruments and Objectives Under the Principle of “Effective Market Classification.”	16
Fig. 1.4	Monetary Expansion Under a Flexible Exchange Rate Regime.	18
Fig. 1.5	Fiscal Expansion Under a Flexible Exchange Rate Regime.	19
Fig. 1.6	Changes in Money Supply Under Fixed Exchange Rates.	20
Fig. 1.7	Changes in Government Expenditure Under Fixed Exchange Rates.	21
Fig. 1.8	A Stylized Illustration of the Transmission Mechanism from Interest Rates to Prices.	26
Fig. 2.1	Inflationary Effects of Demand Changes Under Alternative Hypotheses on the Slope of the Supply Curve.	35
Fig. 2.2	Debt Dynamics in the Case of g>r.	55
Fig. 2.3a	Debt Dynamics in the Case of g<r and d>0.	56
Fig. 2.3b	Debt Dynamics in the Case of g<r and d<0.	56
Fig. 2.4	Ten-year Government Bond Yields in 11 EZ Countries (1999–2017).	57
Fig. 2.5	Crowding-out Effects in a Monetary Union.	60
Fig. 2.6	GDP Growth Rates in 11 EZ Countries (1999–2017).	62
Fig. 2.7a	Change in Structural Balance and Change in Debt in 11 EZ Countries: 2000–2009.	63
Fig. 2.7b	Change in Structural Balance and Change in Debt in 11 EZ Countries.	64
Fig. 3.1	Phillips Curve, USA (1956–1969).	66
Fig. 3.2	Phillips Curve, USA (1956–2007).	69
Fig. 3.3	Phillips Curve, USA (1956–1984).	69
Fig. 3.4	Phillips Curve, Eurozone (1997–2017).	70
Fig. 3.5	Transmission Mechanism of Monetary Policy.	114
Fig. 3.6	Quantitative and Qualitative Approach to the Monetary Policy Conduction.	137
Fig. 3.7	Structure of the New Keynesian Model	149
Fig. 4.1	Monetary Policy Spillover Effects Under Floating Exchange Rates.	156
Fig. 4.2	Fiscal Policy Spillover Effects Under Floating Exchange Rates.	157
Fig. 4.3	Sound Fiscal Dynamics.	162
Fig. 4.4	Unsound Fiscal Dynamics.	163
Fig. 4.5	Solution to Unsound Fiscal Dynamics.	164
Fig. 4.6	Long-term Interest Rates on Government Bonds and Current Account as a Percentage of GDP inSelected Eurozone Countries 2004–2007.	167
Fig. 4.7	Long-term Interest Rates on Government Bonds and Current Account as a Percentage of GDP in Selected Eurozone Countries (2008–2011).	168
Fig. 4.8	Eurozone Trilemma Triangle.	170
Fig. 4.9	Material Deprivation and Cumulative Structural Adjustment: Yearly Means.	173
Fig. 4.10	Change in Material Deprivation and Cumulative Structural Adjustment from 2005-2015 in Single EZ Countries.	174

Tables

Table 2.1	Competing Schools of Thought and Fiscal Policy: Hypotheses and Outcomes.	47
Table 3.1	Exchange Rate Regimes in New EU Member Countries.	104
Table 3.2	Operational and Intermediate Criteria of Monetary Policy.	120

Preface

This book was born from the intention to present in a different light and in a systematic way the institutional structure that regulates economic policy in the European Monetary Union.

The view is shared by both authors, which, despite belonging to different countries and with different personal experiences in respect to the Eurozone institutional consolidation process, found themselves convinced that it was necessary to make explicit the connection between the evolution of the economic theory and the path of construction of the European Monetary Union. The underlying idea is that the rules that determine its functioning are the result of the evolution of economic theory in light of historical facts and that it is essential to understand their meaning in terms of policy proposals. As the Keynesian approach revealed to be inadequate to interpret the facts after the 1970s, now the consolidated new neoclassical synthesis approach appears to be unable to solve the asymmetries inside the Eurozone without questioning the existence of the whole currency area. This approach provides a new perspective from which to examine the current Eurozone policy equilibria and, in the light of current crisis, calls for new answers in terms of policy prescriptions.

The authors would like to thank their families: someone would think that without their presence the book would have been written more quickly. However, they know that in the absence of those affections, they would not have had the necessary strength to carry out the project.

This book is dedicated to Rorita’s family – Francesco, Anna, and Benedetta and Rajmund’s family – Paulina and Ivana.

Acknowledgements

This book benefited from the financial support of the University of Naples “Parthenope”, assigned on an award basis to Rosaria Rita Canale.

This book was written in connection with scientific project VEGA No. 1/0793/19. Financial support from this Slovak Ministry of Education scheme is also gratefully acknowledged.

Book Chapters

Prelims

Introduction

Chapter 1 The Policy Framework in the Eurozone

Chapter 2 Fiscal Policy in the Eurozone

Chapter 3 Monetary Policy in the Eurozone

Chapter 4 Policy Coordination in the Eurozone

Conclusions

References

Index