Rotating Slumps in a Monetary Union

Abstract

Ever since it was created in 1999, the European Economic and Monetary Union (EMU) has experienced surprisingly large and persistent inflation differentials across member states causing substantial shifts in relative price levels. At the same time, member countries exhibited distinct non-synchronized output fluctuations, giving rise to a pattern of 'rotating slumps' (a term coined by Olivier Blanchard). This paper presents a stylized theoretical model of a monetary union which demonstrates how inflation differentials and relative output movements interact dynamically. A number of implications are derived from the model. In particular, national fiscal policies are shown to have an important role in containing internal macroeconomic disparities in a monetary union. An optimal fiscal policy rule is derived from the model to that purpose.Landmann -Rotating Slumps

Poland on the Road to the Euro: How Serious is the Risk of Boom-Bust Cycles after the Euro Adoption? An Empirical Analysis

“…Their model is able to replicate the stylised facts regarding the effects of interest rate convergence in the euro area's peripheral economies (Spain, Ireland, Italy and Portugal), notably an increase in aggregate expenditure and a fall in savings, significant current account deficits, real exchange rate appreciation, and the accumulation of household debt and of a negative net foreign asset position. A very recent paper in this vain is that of Landmann (2011) who presents a stylised theoretical model aiming to explain non-synchronised output and inflation movements in a monetary union.…”

“…The real interest rate channel in a heterogeneous monetary union offers another explanation for the emergence of boom-bust cycles Landmann 2011). Walters (1994) was among the first to point out that common monetary policy in the prospective Economic and Monetary Union can prove to be procyclical in the case of individual economies ("Walters critique").…”

Essays on fiscal and monetary policy interactions in a monetary union

“…The monetary authority has an incentive to be the leader in this game, whereas the national fiscal authorities prefer the other two cases. Landmann (2012) examines the interaction of persistent inflation differentials with centralised monetary policy in a monetary union, and its impact on macroeconomic fragility. Persistent inflation 71 Remember that Staudinger (2003) considers only the positive effect, whereas Andersen (2005bAndersen ( , 2008 deals with both cases.…”

“…This means that the country loses in competitiveness vis-a-vis the rest of the union. However, the resulting reduction in demand eventually decreases the inflation rate, thus acting as a stabilisation mechanism (see, e.g., Gonzalez and Fernandez, 2008;Landmann, 2012). Thus, the competitiveness channel works as a force of automatic stabilisers.…”

“…In the special case that the latter channel does not exist, i.e. = 0, the terms-of-trade effect on the fiscal reaction parameter is negative, as it works as an automatic stabiliser (see, e.g., Landmann, 2012). Last but not least, fiscal policy for both the optimal plan and for overall policy coordination can be either pro-cyclical or counter-cyclical, where the former holds for + > 0.…”