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This paper analyzes the transmission of inflation across the five largest economies in the European Monetary Union, i.e. France, Germany, Italy, Netherlands and Spain. We use monthly CPI inflation rates for the period . Given the long observation period and the continuing economic integration of Europe's economies, we first try to investigate, if there were changes in inflation dynamics in these countries using univariate Markovswitching models. To assess the inflation transmission mechanism, we first establish a long-run relationship between the five countries using cointegration methods. As implied by the results of the univariate models, we allow for changes in the adjustment coefficients of the cointegrating relationships and the short-run dynamics. Using a Markov-switching vector error correction model we find evidence for multiple regime switches during the early 1970s till the mid 1980s. Exactly during this period we find evidence for Germany being weakly exogenous, which highlights the dominance of German monetary policy at this time.Since the mid-1980s we find evidence for a stable transmission mechanism both in the longand the short-run characterized by a low degree of inflation persistence.

This paper analyzes German and Spanish fiscal policy using simple policy rules. We choose Germany and Spain, as both are Member States in the European Monetary Union (EMU) and underwent considerable increases in public debt in the early 1990s. We focus on the question, how fiscal policy behaves under rising public debt ratios. It is found that both Germany and Spain generally exhibit a positive relationship between government revenues and debt. Using Markov-switching techniques, we show that both countries underwent a change in policy behavior in the light of rising debt/output ratios at the end of the 1990s. Interestingly, this change in policy behavior differs in its characteristics across the two countries and seems to be non-permanent in the case of Germany.

This paper analyzes empirically the impact of fiscal policy on the price level for Germany and Spain. We investigate, whether the fiscal theory of the price level (FTPL) is able to deliver a reasonable explanation for the different evolutions of the price levels in these two countries during recent years. We apply a Bayesian VAR model with sign restrictions on the impulse responses to assess the relation between surpluses and public debt. The analysis basically evidences non-Ricardian equilibria in Spain, while the opposite is true for Germany. We interpret this as evidence for the inflation differences in these two countries being partially induced by fiscal policy shocks.

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