EMU@10: Coping with Rotating Slumps

On the eve of the financial and economic crisis of 2008/09, the European Economic and Monetary Union (EMU) could look back to a decade of remarkable macroeconomic stability. Somewhat surprisingly, though, inflation differentials across member states have been substantial and persistent, causing large cumulative changes in relative price levels. This paper presents a stylized theoretical model of a monetary union which demonstrates how persistent inflation differentials can arise from inflation inertia in conjunction with the loss of monetary control on the national level. The interaction of inflation and output dynamics which is at the core of the model generates a pattern of ‘rotating slumps’ (a term coined by Blanchard 2007b). A number of implications are derived from the model which shed light on the observed behavior of cyclical conditions and inflation rates in the euro area. The paper concludes that the monetary-fiscal framework of EMU does not pay adequate attention to the need of dealing with internal macroeconomic tensions within the euro zone.EMU

On the Macroeconomics of European Divergence

Geldpolitik; Finanzpolitik; Währungspolitik; Makroökonomik; Eurozone; Europäische Wirtschafts- und Währungsunion

Saving, Microinsurance: Why You Should Do Both or Nothing. A Behavioral Experiment on the Philippines

This paper analyzes data from a novel field experiment designed to test the impact of two different insurance products and a secret saving device on solidarity in risk-sharing groups among rural villagers in the Philippines. Risk is simulated by a lottery, risk-sharing is possible in solidarity groups of three and insurance is introduced via less risky lotteries. Our main hypothesis is that formal market-based products lead to lower transfers among network members. We also test for the persistence of this crowding-out of solidarity. We find evidence for a reduction of solidarity by insurance if shocks are observable. Depending on insurance design, there is also evidence for persistence of this effect even if insurance is removed. Simulations using our regression results show that the benefits of insurance are completely offset by the reduction in transfers. However, if secret saving is possible solidarity is very low in general and there is no crowding out effect of insurance. This suggests that introducing formal insurance is not as effective as it is hoped for when the monetary situation can be closely monitored, but that it might be a very important complement when savings inhibit observing financial resources. --

EMU and the cyclical behavior of fiscal policy: A suggested interpretation

Fiscal policy is widely criticized for its failure to act as a stabilizing countercyclical force in the European Monetary Union. Two periods should be distinguished: Prior to the Financial Crisis of 2008, when monetary policy had traction to pursue stability for the aggregate eurozone, fiscal policies failed to contain macroeconomic divergence across the currency area. After the crisis, when interest rates had hit the zero lower bound, widespread fiscal austerity exacerbated the persistent recession. The paper proposes a minimal model of decentralized fiscal policymaking in a monetary union. The model is used to interpret policy behavior in both periods. The analysis points to a pro-cyclical bias and suggests a need for coordination

EMU@10: Coping with rotating slumps

On the eve of the financial and economic crisis of 2008/09, the European Economic and Monetary Union (EMU) could look back to a decade of remarkable macroeconomic stability. Somewhat surprisingly, though, inflation differentials across member states have been substantial and persistent, causing large cumulative changes in relative price levels. This paper presents a stylized theoretical model of a monetary union which demonstrates how persistent inflation differentials can arise from inflation inertia in conjunction with the loss of monetary control on the national level. The interaction of inflation and output dynamics which is at the core of the model generates a pattern of 'rotating slumps' (a term coined by Blanchard 2007b). A number of implications are derived from the model which shed light on the observed behavior of cyclical conditions and inflation rates in the euro area. The paper concludes that the monetary-fiscal framework of EMU does not pay adequate attention to the need of dealing with internal macroeconomic tensions within the euro zone

The US economy under the influence of the Reagan experiment

Ronald Reagan's first term of office is drawing to a close. What has become of the promises he made in his economic programme four years ago and what is the outlook for the short and medium term

Not more than three tissue kallikreins identified from organs of the guinea pig

The large and varied multigene families of tissue kallikreins of rat and mouse are considered to selectively release as many bioactive peptides. In order to determine whether a similar family of enzymes is expressed in the organs of the guinea pig purification studies were performed. Tissue kallikreins from the submandibular gland, coagulating gland/prostate complex and the pancreas were separated by affinity chromatography on benzamidine-Sepharose. Amino-terminal sequences, the patterns of hydrolysis rates of a number of peptide p-nitroanilides, inactivation rates by active site-directed irreversible inhibitors, specific kininogenase activities and types of kinin released were used to probe the identity of the isolated enzymes. Guinea pig tissue kallikreins 1 and 2 have been reported previously. In the present study we have identified a third type, designated tissue kallikrein la because of its sequence similarity to kallikrein 1, which differs from the latter in the catalytic properties. The inferred occurrence of not more than two or three independent tissue kallikrein genes in the guinea pig contrasts with the varied family of enzymes expressed by the large number of such genes present in rats and mice. Expression in the guinea pig (and also in humans) of only a small number of tissue kallikreins makes specific processing of a multitude of biologically active peptides by such enzymes unlikely