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In a recent paper in this journal [Demertzis, M., Hughes Hallett, A., Viegi, N., 2004. An independent Central Bank faced with elected governments: European Journal of Political Economy 20, 907-922.] we showed that, when voting is endogenised, an independent and conservative Central Bank will create the tendency for elected governments to become more liberal or populist. That causes policies as well as preferences to diverge. But we did not show whether the Central Bank would then become more conservative in response, by way of disciplining the fiscal authority and protecting its own preferred targets. Building on these earlier results, we examine that question in this paper. I find that the Central Bank would, in its own interest, not retaliate in this fashion except where the government's target for output growth becomes very ambitious. This behaviour seems to match what little empirical evidence we have on Central Bank reactions. [Copyright 2008 Elsevier B.V.]

Fiscal policy in Britain has changed radically since the Keynesianism of the 1960s and 1970s. After a passive period under monetarism of the 1980s, fiscal policy is said to have adopted a leadership role with long term objectives (low debt, the provision of public services/ investment, and social equity), together with an independent central bank. Monetary policy, operating with instrument independence, then takes care of short run stabilisation. I test this view – confronting it with evidence from the institutional arrangements put in place since 1997; with econometric evidence from the policy responses themselves; and with theoretical evidence on the incentive to choose such a regime in the first place. I conclude that this claim is broadly correct. It appears that the UK's improved performance is a consequence of the advantages of combining fiscal leadership with an (instrument) independent central bank. The key feature is the ability to trade target (not instrument) independence in monetary policy to secure greater coordination between fiscal and monetary strategies.

Macroeconomic Modelling has undergone radical changes in the last few years. There has been considerable innovation in developing robust solution techniques for the new breed of increasingly complex models. Similarly there has been a growing consensus on their long run and dynamic properties, as well as much development on existing themes such as modelling expectations and policy rules. This edited volume focuses on those areas which have undergone the most significant and imaginative developments and brings together the very best of modelling practice. We include specific sections on (I) Solving Large Macroeconomic Models, (II) Rational Expectations and Learning Approaches, (III) Macro Dynamics, and (IV) Long Run and Closures. All of the contributions offer new research whilst putting their developments firmly in context and as such will influence much future research in the area. It will be an invaluable text for those in policy institutions as well as academics and advanced students in the fields of economics, mathematics, business and government. Our contributors include those working in central banks, the IMF, European Commission and established academics

Price and output level convergence between new member states and the existing EU economies necessarily implies inflation and growth divergence for many years to come. This complicates the conditions for accession to the Euro. In this paper, we focus on debt dynamics for the eight new member states from Central and Eastern Europe. We find that the nominal Maastricht criteria are at best irrelevant, and may be damaging for the duration of the catch-up process and well past any likely dates for Eurozone entry. There are also strong indirect effects of nominal criteria, which make it more difficult to achieve the fiscal criteria. Our results therefore suggest all countries would find it harder to restrain debt growth under the Maastricht criteria. However, this effect varies substantially across countries. If the nominal criteria are suspended, the policy instruments required to achieve Euro convergence are in the hands of the individual member states. This implies that the principle of subsidiarity could be applied to Euro membership. [Copyright 2006 Elsevier B.V.]

Prior to EMU, fiscal policy within the EU was disciplined by the threat of exclusion of the single currency; post-EMU, discipline has been exerted through the provisions of the Stability and Growth Pact. In this paper, we contrast the discipline induced by the two separate regimes on three specific criteria: the probability of violating the 3% deficit limit, the probability of commencing a budgetary consolidation, and the longevity of a budgetary consolidation once undertaken. We find that the runup to EMU did lead to a marked increase in the probability of commencing consolidations. However, once inside EMU, this discipline gradually slipped - with the longevity of consolidations being reduced year on year, and the probability of violating the 3% limit rising year on year. By 2004, the cumulative slippage meant that the initial disciplinary benefits of joining the Euro were completely eroded. Growth accounting analysis reveals that the source of the problem was the reliance on growth to meet budgetary targets and a corresponding failure to build up adequate surpluses at the top of the cycle. ; Vor dem Beitritt zur EWU wurde die Fiskalpolitik durch den möglichen Ausschluss einer einzelnen Währung diszipliniert. Nach dem Beitritt erfolgt diese Disziplinierung durch den Stabilitäts- und Wachstumspakt. Im vorliegenden Aufsatz wird die in beiden Regimen ausgeübte Disziplinierung an drei verschiedenen Kriterien überprüft: der Wahrscheinlichkeit, das 3 %-Kriterium zu verletzen, der Wahrscheinlichkeit, eine Konsolidierung einzuleiten, sowie der Langlebigkeit einmal unternommener Konsolidierung. Im Vorlauf zur EWU stieg die Wahrscheinlichkeit, Konsolidierungen einzuleiten. Waren die Länder jedoch erst einmal aufgenommen, sank die Disziplin deutlich, die Nachhaltigkeit der Konsolidierung nahm ab, und die Wahrscheinlichkeit für die Verletzung des 3 %-Kriteriums stieg. Im Jahre 2004 waren die disziplinierenden Vorzüge des Beitritts zur EWU aufgebraucht. Die Analyse zeigt, dass die Quelle des Problems darin lag, auf Wachstumseffekte zur Konsolidierung gebaut und keine angemessenen Übersc

Most economists argue that transparency in monetary policy is desirable because it helps the private sector make better informed decisions. They also argue that a lack of transparency has been a key problem in Europe's monetary policy. Using standard models—where there are also opportunities to use fiscal policy—we show that a lack of transparency will have very different effects depending on whether it represents a lack of political transparency or a lack of economic (or information) transparency. The former allows the central bank to create and exploit a 'strategic' reputation to its own advantage. The latter does not. Thus, political transparency helps us understand how monetary policy decisions are made. But economic transparency would reveal what information went into those decisions.

An Independent Central Bank is often associated with being able to achieve low inflation and greater output stability than government run policies. In this paper we examine whether, and under what circumstances, an independent Central Bank can achieve both these targets with only one policy instrument at its disposal. This turns out to be possible in some special cases, or sometimes for limited periods of time, but not in general. It is an outcome which arises when increasingly conservative policies reduce the 2 target, 1 instrument conflicts, rather than from the suppression of any political cycle.