In this paper, we present an application of the dynamic tracking games framework to a monetary union. We use a small stylized nonlinear three-country macroeconomic model of a monetary union to analyze the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm, we calculate solutions for several games: a noncooperative solution where each government and the central bank play against each other (a feedback Nash equilibrium solution), a fully-cooperative solution with all players following a joint course of action (a Pareto optimal solution) and three solutions where various coalitions (subsets of the players) play against coalitions of the other players in a noncooperative way. It turns out that the fully-cooperative solution yields the best results, the noncooperative solution fares worst and the coalition games lie in between, with a broad coalition of the fiscally more responsible countries and the central bank against the less thrifty countries coming closest to the Pareto optimum.
Abstract The euro area consists of several small open, fairly heterogeneous economies. The establishment of this common currency area greatly changed the macroeconomic interdependency between its member countries. This thesis examines the fundamental macroeconomic linkages and spillover effects between the monetary union member countries with the focus on the phenomena associated with the countries' openness to international trade. This doctoral thesis consists of three essays. The first essay examines the impact of the implementation of a monetary union on international economic fluctuations. The essay finds that the implementation reverses the expenditure-switching effects between goods produced inside the monetary union, and helps to stabilize economic fluctuations. The second essay examines the effects of openness to international trade on a small monetary union. The essay shows howmovements in the monetary union's exchange rate stabilize output fluctuations inside the monetary union and reduce the need for fiscal stabilization. The third essay argues that, under a non-coordinated optimal fiscal policy, government spending should focus on the stabilization of a local output gap and inflation, while union-wide aggregate fluctuations should be stabilized by a common independent monetary policy. The essay also shows how a suboptimal monetary policy increases the spillover effects of countryspecific shocks. ; Tiivistelmä Tässä väitöskirjassa tutkitaan rahaliiton maiden välisiä makrotaloudellisia riippuvuussuhteita. Tutkimuksessa keskitytään erityisesti kansainvälisen kaupan ilmiöihin. Väitöskirja koostuu kolmesta erillisestä esseestä. Ensimmäisessä esseessä käsitellään rahaliiton perustamisen vaikutuksia kansainvälisen talouden dynamiikkaan. Tulosten mukaan rahaliiton perustaminen muuttaa vaihtosuhteen dynamiikkaa rahaliiton sisällä. Lisäksi rahaliiton muodostaminen vaimentaa jäsenmaiden makrotaloudellisia heilahteluita. Toisessa esseessä tutkitaan kansainvälisen kaupan merkitystä pienen rahaliiton tapauksessa. Havaitaan, että yhteisvaluutan kurssimuutokset tasapainottavat rahaliiton sisäisiä reaalitalouden muutoksia ja vähentävät tarvetta tasapainottaa taloutta finanssipolitiikan avulla. Kolmannessa esseessä osoitetaan, että rahaliiton jäsenvaltioiden harjoittaman itsenäisen finanssipolitiikan tulisi keskittyä kotimaisen inflaation ja tuotannon tasapainottamiseen. Yhteisen rahapolitiikan tulisi puolestaan tasapainottaa rahaliiton keskimääräisiä muutoksia. Tulosten mukaan epäoptimaalinen rahapolitiikka voimistaa maakohtaisten reaalitaloudellisten muutosten välittymistä muihin rahaliiton maihin.
The paper explores the interaction between the proposed monetary union for ECOWAS and structural reforms of fiscal policy. The effects depend to a large extent on the degree of similarity of member countries. In a monetary union of similar countries, member states run a more distortive fiscal policy, while their structural reform efforts will fall. This is also the case for countries that unilaterally peg to an anchor currency or introduce a foreign currency. In an monetary union with dissimilar countries the reverse can happen for those member states that are confronted with high distortion countries. This result implies that current WAEMU members will run a less distortive fiscal policy after the inclusion of other members of ECOWAS.
The last few years, the economic divergences which were observed in macroeconomic performances of the EU's Member States as well as the low rate of their economic adaptation within the EMU, had raised concerns about the long-run sustainability of the EMU. During the first decade, the EMU has not decisively contributed to the creation of a stable and strong macroeconomic environment for the Member States as the real economic convergence remained on paper. The economic heterogeneity is likely to lead to asymmetric economic preferences concerning the economic policies which are followed by each of the Members States. This increases the likelihood of future conflicts and reduces the possibility of the creation of a genuine monetary union. In this regard, the Member States continue to pursue their own economic policies, mainly based on their national preferences and it is very difficult to change in the very short-run the culture of economic policy they represent.
We provide a general equilibrium framework for analyzing the effects of supply and demand side policies, and the potential synergies between them, in an asymmetric monetary union that faces a liquidity trap and a slow deleveraging process in its 'periphery'. We find that the joint implementation of pro-competition structural reforms in the periphery, a fiscal expansion in the 'core', and forward guidance about the three policies: forward guidance re-inforces the expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
This thesis consists of three separate, but interlinked chapters on national fiscal policy in a monetary union. Throughout, I employ new Keynesian models that are augmented by the introduction of overlapping generations of the Blanchard-Yaari type. The first chapter presents an analytically tractable two-country model of a currency union, which abstracts from distortions other than sticky prices in the goods market and failures of the Ricardian equivalence. Here, the government chooses a certain level of public spending. The government's options of financing its public spending are limited to public debt or taxation. I find that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic variables. The spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods. The second chapter restricts the attention to a new Keynesian closed economy model that features public as well as private investment. The government is in a position to employ either spending-side measures, i.e. cuts in public consumption, or improve public revenues in order to finance a temporary fiscal expansion. Both, the financing decision as well as possible failures of the Ricardian equivalence have a large impact on how fiscal measures affect key macroeconomic variables. The results suggest that a single deviation from the standard model, e.g. failures of the Ricardian equivalence, is not sufficient to reconcile theory and empirical evidence. The last chapter builds on these findings and develops the issue further by extending the model of chapter 2 to a two-country model of a currency union. I focus on fiscal measures that are frequently employed in practice. When assessing the impact of central components of the European Economic Recovery Plan on the economy of the implementing country, I look also at the implied spillovers. Finally, a brief summariy of some major results of the three chapters: Failures of the Ricardian equivalence enable theoretical models to yield predictions that are close to empirical evidence. However, this comes at the price of deviating from the Ricardian equivalence in a way which cannot be confirmed empirically. The introduction of a more complex fiscal sector and the assumption that fiscal policy is endogenous, allows for moving theoretical predictions closer to the empirical evidence without having to rely crucially on deviations from Ricardian behavior. My results suggest that focusing on distortions in intertemporal optimization is a too narrow approach to tackle with research questions related to the conduct and effects of fiscal policy in theoretical models.
A monetary union requires that a common central bank be shared among multiple nations, where governments and households may well be heterogeneous across national borders. A dynamic stochastic general equilibrium model of a two-country monetary union provides a natural setting in which to examine the implications of agent heterogeneity in government fiscal policies can be accommodated within a monetary union. Second, household heterogeneity gives monetary policy a reallocative dimension which affects price-level determination. For example, dissimilar preferences for holding money tend to enhance the potency of a monetary contraction to lower inflation. Fiscal federalism may reverse this effect.
A European Monetary Union (EMU) and the complete transfer of the responsibility for monetary policy to a European central bank are no longer utopian ideas, but a politically highly relevant possibility. The question how economic policy goals can be achieved within such a monetary union is therefore gaining in importance.
This paper analyzes the dynamic effects of anticipated and unanticipated oil price increases in a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. It is shown that both types of oil price disturbances lead to temporary divergences in output developments across the monetary union. In the case of anticipated oil price increases the relative cyclical position of output effects is reversed in the course of the adjustment process. With anticipated oil price increases complete stabilization of the output variables throughout the overall adjustment process requires restrictive monetary policy to be time-inconsistent from a quantitative but time-consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of nominal money stock but actually realizes a decrease in the monetary growth rate, which is less restrictive than the announcement.
This paper analyzes the dynamic effects of anticipated and unanticipated foreign price increases of imported raw materials for a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. It is shown that both types of input price disturbances lead to temporary divergences in output developments across the monetary union. In the case of anticipated materials price increases the relative cyclical position of output effects is reversed in the course of the adjustment process. With anticipated input price increases complete stabilization of the output variables throughout the overall adjustment process requires restrictive monetary policy to be time-inconsistent from a quantitative but time-consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of nominal money stock but actually realizes a decrease in the monetary growth rate, which is less restrictive than the announcement.
The paper examines the monetary-fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. We first show that monetary uncertainty disciplines fiscal policymakers and thereby reduces taxes, average inflation and output distortions. However, as more members enter the monetary union, the fiscal disciplining effect of uncertainty is mitigated. As a consequence, monetary union enlargement may lead to a more aggressive fiscal stance in some member countries, depending on their relative economic and political weights, on their government's spending target, and on the change in the degree of uncertainty that they experience with the enlargement.
Defence date: 15 November 2012 ; Examining Board: Professor Giancarlo Corsetti,University of Cambridge (External Supervisor) Professor Gianluca Benigno, London School of Economics Professor Russell Cooper, Penn State University Professor Henrik Jensen, University of Copenhagen. ; This thesis investigates the implications of imbalances within a monetary union. In the first chapter, I study how international financial frictions lead to international imbalances and affect optimal fiscal policy in a two-country, two-good DSGE model of a monetary union. I show that the presence of international imbalances affects the optimal conduct of cooperative fiscal policies when the traded goods are complements. Government expenditures optimally play a cross-country risk sharing role which is in conflict with the domestic stabilization role: optimal fiscal policy consists in setting government expenditures such as to reduce international imbalances at the expense of higher domestic inefficiencies. In the second chapter, I assess the implications of strategic fiscal policy interactions in a two-country DSGE model of a monetary union with nominal rigidities and international financial frictions. I show that the fiscal policy makers face an incentive to set fiscal policy such as to switch the terms of trade in their favour. This incentive results in a Nash equilibrium characterized by excessive inflation differentials as well as sub-optimally high current account imbalances within the monetary union. There are thus non-negligeable welfare losses associated with strategic fiscal policy making in a monetary union. The third chapter investigates empirically the degree of risk sharing in the European Economic and Monetary Union (EMU), using two different methods. The first measure relates to the capacity of consumption smoothing. This measure indicates that risk sharing is rather low and that the introduction of the common currency did not lead to higher intra-EMU risk sharing. The second measure is based on the welfare losses associated with deviations from full risk sharing. These welfare losses have fallen since the introduction of the common currency. However, this is mostly due to changes in macroeconomic risk - not to changes in risk sharing per se.
This paper studies whether a monetary union can be managed solely by a rule-based approach. The Five Presidents' Report of the European Union rejects this idea. It suggests a centralisation of powers. We analyse the philosophy of policy rules from the vantage point of the German economic school of thought. There is evidence that a monetary union consisting of sovereign states is well organised by rules, together with the principle of subsidiarity. The root cause of the euro crisis is rather the weak enforcement of rules, compounded by structural problems. Therefore, we suggest a genuine rule-based paradigm for a stable future of the Economic and Monetary Union.
ÖZETBu tezde, Ekonomik ve Parasal Birlikleri ve Batı Afrika Ekonomik ve Parasal Birliğinin(WAEMU) kurulmasının bölgesel ticaret tanıtımına ve entegrasyona nasıl katkıda bulunduğuincelenecektir. Daha spesifik olarak, Batı Afrika para biriminin (CFA) ticaret üzerindeki etkisiniaraştırıyor. WAEMU üyeleri arasında ticarete diğerlerinden daha açık olan ve üyelik bakımındandiğerlerinden Mali, Senegal ve Togo'ya göre daha fazla fayda sağlayan bazı kişiler var. Örneğin,ağırlık modelini kullanan ampirik sonuçlar, aynı para birimini paylaşan ülkelerin - Batı AfrikaCFA - ticaret yaptıkları ülkelerin, diğerlerinden iki kat fazla (2.23) ticaret yaptıklarınıgöstermektedir; bu, ekonomik açıdan ve statik olarak önemlidir. Buna ek olarak, WAEMUülkelerinin ayrıcalıklı ticaret ortağının ticaretinin üç katından fazla olduğu (3.67) Asya ülkeleriolduğunu görüyoruz. Buna ek olarak, bitişikliğin, tarihsel ve kültürel bağların ikili ticareti vebölgesel bütünleşmeyi teşvik ettiğine dair güçlü kanıtlar buluyoruz. Örneğin, tarihi ve kültürelbağları paylaşan ülkeler arasında % 51.7 daha fazla değişim gerçekleşir. Yerçekimi modelinin yanısıra Zivot-Andrews (1992) Yapısal Kırılmayla Birim Kök Testi ve WAEMU üyelerinin az çokaynı iş döngüsüne sahip olduklarını buluyoruz. Sürdürülebilirlik ve daha açık ekonomiler için,WAEMU üye ülkelerinin makroekonomik yakınsama kriterlerine saygı gösterilmesi ve ayrıcaüretken kapasitelerin oluşturulması zorunludur. Bölgesel entegrasyonu güçlendirmek için BatıAfrika Raylı Geçiş Projesinin tamamlanması da çok önemlidir.ABSTRACTThis dissertation examines the Economic and Monetary Unions and how the establishment of WestAfrican Economic and Monetary Union (WAEMU) contributes to regional trade promotion andintegration. More specifically, it explores the effect of West African currency (CFA) on trade. WithinWAEMU members, there are some countries who are more open to trade than others and also benefitmore from the membership. Countries like Mali, Senegal and Togo can be given as examples.Empirical findings using gravity model suggests that countries sharing the same currency - WestAfrica CFA – trade over two times (2.23) as much between them than with others which iseconomically meaningful and statistically significant. In addition, we find that the privileged tradepartner of WAEMU countries are Asian countries with whom they trade more than three times (3.67)than with the rest of the world. Furthermore, we find a strong evidence showing that contiguity andhistorical and cultural links encourage bilateral trade and regional integration. It is observed thatcountries sharing historical and cultural links trade 51.7% more with each other. Besides the gravitymodel, we use Zivot-Andrews (1992) unit root test with structural break and find that WAEMUmembers have more or less the same business cycle. For sustainability and more open economies, itis imperative that WAEMU member countries respect the macroeconomic convergence criteria and also build productive capacities. It is also crucial to complete the West African Rail Loop Project tostrengthen regional integration.
This paper aims at empirically assessing the effect of the adoption of the euro on the ability of euro area member states to smooth consumption and share risk. With the objective of evaluating the economic performance of euro area countries in the scenario where the euro had not been adopted, we construct a counterfactual dataset of macroeconomic variables via the Synthetic Control Method. In order to get some preliminary measures of risk sharing, we compute correlations between consumption and GDP within a country, bilateral consumption correlations, and Brandt-Cochrane-Santa Clara indices across euro area member states. We then decompose risk sharing in different channels by means of the Asdrubali, Sorensen and Yosha (1996) output variance decomposition. Our difference in difference estimates show that the euro has not affected the level of international risk sharing across euro area countries, but has partially reduced the ability of member states to smooth consumption. We attribute this change to the higher GDP growth generated by the adoption of the euro, which has been accompanied by a greater output volatility. We also report differential effects for euro area core and periphery countries, showing that the former have not suffered any negative effect from the adoption of the euro in terms of risk sharing whereas the latter are now less able to smooth consumption. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
