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International Monetary Fund
The paper addresses issues that arise in designing a framework for inflation targeting, with particular attention to features of the Bank of England's approach and experience. The comparison of welfare reform in the United Kingdom with similar efforts in other countries is discussed. The paper reviews the recent literature and empirical evidence on the main economic considerations influencing possible U.K. entry into the European Monetary Union (EMU). The U.K. labor market has undergone institutional and structural changes contributing to an increase in both aggregate and relative wage flexibility.
Mr. Benedict J. Clements, Mr. Zenon Kontolemis, and Mr. Joaquim Vieira Ferreira Levy
This study identifies differences in the monetary policy transmission mechanism across the countries in the euro area. It is argued that part of the differences in the response of economic activity to monetary policy during the pre-EMU period, found in other studies, reflected differences in monetary policy reaction functions, rather than different transmission mechanisms. In light of this, the paper constructs an empirical model on the basis of common reaction functions. The results confirm that even when a common monetary policy is implemented, its effects on economic activity are likely to differ across EMU countries. The paper also constructs an aggregate measure of the effect of monetary policy on prices and output. Finally, the paper examines the relative strength of the credit, exchange rate, and interest rate channels of monetary transmission in EMU countries.
Mr. David K. H. Begg

to verify, preferences of its decision makers and to its model of how the EMU economy works, on which there is substantial scope for disagreement. Simply asserting how the ECB is likely to behave is different from confirming that these predictions are reliably borne out. There is no substitute for a good track record. Is economic theory helpful in contemplating how this is likely to be established? What is involved is a signaling game, originally introduced into macroeconomics, albeit in stylized form, by Backus and Driffill (1985) and Barro (1986) . The main

Ms. Susan M Schadler

. Controversial empirical work by Rose and Van Wincoop (2001) suggests, for example, that the euro will cause trade among EMU economies to rise by more than 50 percent. 9 The Austrian experience stands in stark contrast to the Finnish experience despite a number of formal similarities. As had been the case in Austria, in Finland the financial sector was tightly regulated, and capital controls were in place into the 1980s. Similarly, early deregulation measures took place around 1980 (1979 in Austria and 1983 in Finland), with the bulk of deregulation and liberalization

Ms. Susan M Schadler

versa. Although very simple in theory, achieving a countercyclical fiscal stance has proved difficult in practice. Politically, it is hard to explain the rationale for a tight fiscal stance when an economy is doing well and its fiscal position looks good. In such situations, governments face intense pressures to lower taxes and/or increase public spending. Institutional frameworks that aim to avoid these pressures have not been very successful. One only has to recall the first four years of experience with the EMU economies. Another shock absorber emphasized in

Mr. Michael Frenkel and Mr. Christiane Nickel
In this paper, we use a structural vector autoregression model to identify and compare demand and supply shocks between euro area countries and central and eastern European countries (CEECs). The shocks and the shock adjustment dynamics of these countries are also compared to EU countries that currently do not participate in the EMU. Focusing on the period 1993-2001, we find that there are still differences in the shocks and in the adjustment process to shocks between the euro area and the CEECs. However, several individual CEECs exhibit shocks and shock adjustment processes that are fairly similar to some euro area countries.
Mr. Jeffrey A. Frankel

synchronization with the EMU economy: Hungary, Poland, and Slovenia during 1998–2002, as compared with 1993–97. The implication is that these three now best satisfy the convergence criterion for joining the EMU optimum currency area. The lesser EMU correlation for the Czech and Slovak republics is attributed to financial crises in the late 1990s, and the lack of any EMU correlation for the Baltics is attributable to their greater relative exposure to Russia and Sweden. It is no coincidence that the EU makes up a higher share of the exports of Hungary, Poland, and Slovenia than

Ms. Susan M Schadler

Abstract

These comments draw both on the European Central Bank (ECB) paper by Christian Thimann and on the United Kingdom’s assessment of the five economic tests (convergence, flexibility, investment, financial services, and growth/stability/employment) for European Monetary Union (EMU) entry in order to draw insights for accession countries on their approach to the EMU.

Ms. Susan M Schadler

Abstract

I very much enjoyed reading Lipschitz, Lane, and Mourmouras’s insightful and thought-provoking paper. It addresses extremely important issues for the new member states (NMS), such as how to further real convergence and deal with capital flows. The authors use both real and financial economy arguments—namely, the production function and competitive equilibrium conditions, on one hand, and financial arbitrage conditions, on the other—to argue that capital flows to NMS are bound to be very large. Moreover, they argue that, given the intrinsic volatility of capital flows, these countries are likely to become more vulnerable to capital flow reversals that could complicate the conduct of monetary and exchange rate policies and undermine macroeconomic stability.

Ms. Susan M Schadler

Abstract

Labor market policies and institutions are perhaps the least-discussed aspect of euro adoption—at least from my experience. Thus, I welcome the inclusion of this subject in the conference agenda and the contribution of Professor Boeri’s interesting paper.