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961. The Road to Adopting the Euro: Monetary Policy and Exchange Rate Regimes in EU Candidate Countries

Author:
Fabio M. Natalucci and Federico Ravenna
Publication Date:
12-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines the choice of exchange rate regime in EU candidate countries during the process of accession to the European Monetary Union (EMU). In the presence of real exchange rate appreciation due to the Balassa-Samuelson effect, candidate countries face a trade-off between trend appreciation of the nominal exchange rate and high inflation rates. In a general equilibrium model of an emerging market economy, we show that under a fixed or heavily managed exchange rate the Balassa-Samuelson effect might prevent compliance with the Maastricht inflation criterion, unless a contractionary policy is adopted. We then discuss how the real exchange rate appreciation shifts the output gap/inflation variance trade-off, increasing the cost of managing or fixing the exchange rate. As a consequence, the requirement of membership in the Exchange Rate Mechanism (ERM-II) and the Maastricht inflation criterion constrain the policy choice while providing no additional benefit to countries credibly committed to joining the Euro. Finally, we show that relaxing either the exchange rate requirement or the inflation criterion has sharply different business cycle implications for the accession countries.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
Europe

962. Monetary Union, Price Level Convergence, and Inflation: How Close is Europe to the United States?

Author:
John H. Rogers
Publication Date:
10-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In light of 50 years of economic policies designed to integrate Europe -- culminating in the elimination of euro zone national currencies in early 2002 -- and a vast academic literature on international economic integration, it is of interest to assess how far European integration has come in practice. Using a unique data set, I document the pattern of price dispersion across European and U.S. cities from 1990 to 2001. I find a striking decline in dispersion for traded goods prices in Europe, most of which took place between 1991 and 1994. The level of traded goods price dispersion in the euro area is now quite close to that of the United States. A decline in dispersion of non-tradeables prices in Europe has also taken place, but to a smaller extent. For U.S. cities, there is no evidence of a decline in price dispersion, even for tradeables. I examine several possible explanations for the decline in European price dispersion, including harmonization of tax rates, convergence of incomes and labor costs, liberalization of trade and factor markets, and increased coherence of monetary policy. I also investigate how much of the variation in national inflation rates in Europe can be explained by price level convergence. Finally, after showing that prices in likely next-round entrants into the euro zone are well below prices in Western Europe, I discuss the potential inflationary consequences of accession into monetary union for Eastern Europe.
Topic:
Economics and International Trade and Finance
Political Geography:
United States and Europe

963. Equity Prices, Household Wealth, and Consumption Growth in Foreign Industrial Countries: Wealth Effects in the 1990s

Author:
Carol C. Bertaut
Publication Date:
04-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Although most recent empirical research regarding the size and significance of the impact of changes in wealth on consumption has looked for such effects in the United States, equity prices in the 1990s rose considerably in most other industrial countries as well. This paper investigates the strength of the wealth effect across countries. Using a variety of methods, I find evidence of significant wealth effects in the United Kingdom and Canada of a size comparable to that in the United States, reflecting the importance of equities in aggregate household wealth in these countries. A significant wealth effect is also evident in Japan, but because household wealth has changed little on balance in Japan in recent years, this channel has been less important in explaining Japanese consumption growth in the second half of the 1990s. Despite a rapid appreciation in equity prices and an increase in equity ownership in the major continental European countries since 1995, equities remain a less important form of household wealth in most of these countries, and the consumption response to changes in wealth remains limited. However, in some smaller European countries where equity issuance is more common, the emerging evidence suggests that wealth effects may be more important.
Topic:
International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:
United States, United Kingdom, Europe, and Canada

964. International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?

Author:
Joseph E. Gagnon, Dale W. Henderson, Brian M. Doyle, and Laurence H. Meyer
Publication Date:
04-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this paper we provide two building blocks for an analysis of international policy coordination: (1) a survey of models of policy coordination, and (2) an account of experience with policy coordination among the G-7 countries and within Europe since the breakdown of the Bretton Woods System. Using these building blocks, we investigate the correspondence between the models and experience and attempt to draw lessons for both the modelers and the practitioners. We find that the correspondence is close enough that the models help in analyzing several instances of actual policy coordination, but that the correspondence could be even closer. As for lessons for modelers, we suggest that they devote more attention to the analysis of information exchange, a key feature of practical policy coordination; to the coordination of different types of policies; to the ramifications of political divisions within countries; and to the implications of market irrationality and speculative bubbles. As for lessons for policy makers, we suggest that they give more consideration to the choice of their ultimate objectives, in particular to whether the current account should always be close to balance; to achieving better internal policies; and to the greater use of fiscal policy as a stabilization tool.
Topic:
International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:
Europe

965. Regional Influences on U.S. Monetary Policy: Some Implications for Europe

Author:
Ellen E. Meade and D. Nathan Sheets
Publication Date:
02-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper looks at the monetary policy decisions of the U.S. Federal Reserve and asks whether those decisions have been influenced solely by national concerns, or whether regional factors have played a role. All of the Federal Reserve's policymakers have some regional identity, i.e., either their positions explicitly carry some regional affiliation or their region of origin is a factor that must be considered in the selection process. This research is relevant for the Fed, and it may also be relevant for Europe's fledgling central bank in Frankfurt. Critics have asserted that ECB policymakers have an incentive to base policy on national developments and respond to national political pressures. We find that Fed policymakers do take into account developments in regional unemployment when deciding monetary policy, and that these regional developments are more important for central bankers at the hub than in the spokes. These findings are robust to a variety of different specifications of the voting equation.
Topic:
Economics and International Trade and Finance
Political Geography:
United States and Europe

966. Criteria Of Success And Failure In Hungary's Democratisation Process – A Methodological Experiment For Comparable National Case Studies

Author:
Zoltan Martinusz
Publication Date:
10-2002
Content Type:
Working Paper
Institution:
Geneva Centre for Security Sector Governance (DCAF)
Abstract:
The objective of this paper is to provide a brief general analysis of the democratisation of the security sector in Hungary in the decade following the political changes of 1989-1990 and highlight elements of success and failure. It must be underlined at the very beginning that the following analysis is of an experimental nature and is intended to serve more as a basis for future debate than an ultimate framework and example for similar analyses regarding other countries.
Topic:
Security, Democratization, and Economics
Political Geography:
Europe and Hungary

967. How does globalisation affect local production and knowledge systems? The surgical instrument cluster of Tuttlingen, Germany

Author:
Gerhard Halder
Publication Date:
03-2002
Content Type:
Working Paper
Institution:
Institute for Development and Peace
Abstract:
The recent discussion of the winners and losersfrom globalisation has given prominence to regional development and industrial clusters in the global organisation of production and know-how. Tuttlingen, in southern Germany, is the recognised world leader in the global surgical instruments industry. However, price competition from emerging low-cost locations in South and South/East Asia and Eastern Europe, and rapid technological developments in medical engineering pose new challenges for the Tuttlingen cluster. In the past, institutional joint action was one of the pillars of the cluster's success, but there are doubts as to whether such institutions can face the new challenges. New public-private initiatives suggest a way forward, but it is too early to gauge their impact. In the past there wereimportant examples of small and medium sized firms coming togetherin joint marketing, production, and research and development efforts. While they continue, local competition has become more intense, making inter-firm co-operation more difficult. Some firms do, however, co-operate with suppliers further down the value chain, particularly those in Pakistan and Malaysia. The new challenges are also leading to further differentiation, both amongst firms as well as between producers and traders within the cluster. The most radical forms of product and functional upgrading are being concentrated in the cluster' sleading large firms. Innovation seems to be linked to close ties with end-users, the concentration of knowledge in medical engineering, and changes in surgical practices and health care delivery. Thus, the cluster while the 'big fish' in its own pond of surgical instruments, is having to come to terms with being a 'small fry' in the larger sea that constitutes the global health care sector.
Topic:
Development, Economics, Globalization, and Regional Cooperation
Political Geography:
Europe, East Asia, and Germany

968. Precocious British Industrialization: A General Equilibrium Perspective

Author:
N.F.R. Crafts and C. Knick Harley
Publication Date:
01-2002
Content Type:
Working Paper
Abstract:
The British industrial revolution created an industrial economy. While casual discourse conflates industrialization and economic growth, Britain was remarkable primarily for the pronounced structural change that occurred rather than for rapid economic growth. Uniquely the British labour force became highly industrialized even prior to the move to free trade in the 1840s. On the eve of the abolition of the Corn Laws the share of agriculture in employment had already declined to levels that were not reached in France and Germany until the 1950s.
Topic:
Economics and Industrial Policy
Political Geography:
Britain, Europe, France, and Germany

969. Creation of the Euro Area: Implications for Economic Statistics

Author:
Paul Schreyer
Publication Date:
02-2002
Content Type:
Policy Brief
Institution:
The Organisation for Economic Co-operation and Development
Abstract:
A major event in early 2002 was the arrival of the euro banknotes and coins and the withdrawal of the existing twelve national currencies from circulation. The event has influenced every citizen in the euro area and is clearly a historic change. It heralds a new phase in forging an “ever closer union among the peoples of Europe”. In economic terms, however, the introduction in January 1999 of the single currency after determining the irrevocably fixed exchange rates of the national currencies with the euro was a more important event. It meant that decisions on monetary policy moved from national central banks to the Governing Council of the European Central Bank. This Statistics Brief highlights some of the consequences for economic statistics of the creation of the euro area.
Topic:
Economics and Political Economy
Political Geography:
Europe

970. International — Auto Consolidation

Publication Date:
06-2002
Content Type:
Policy Brief
Institution:
Oxford Analytica
Abstract:
Fiat announced a sharp fall in May car sales in Italy on June 5 and its debt is under review for a possible ratings downgrade. The world's sixth-largest car maker is one of many manufacturers facing difficult profitability conditions. Global sales volumes in the industry have remained high, but profits have not followed suit. Mergers, the most rational panacea, are confounded by bitter experience.
Topic:
Economics, Industrial Policy, and International Trade and Finance
Political Geography:
United States and Europe