Suchergebnisse

This study explores real time uncertainty in euro area fiscal policies since the late 1990s. Using real time data from the OECD Economic Outlook publications we investigate the impact of real time uncertainty on fiscal planning and debt accumulation separately for two country groups in the euro area: countries in geographical periphery (Greece, Ireland, Italy, Portugal and Spain) and other euro area countries (Austria, Belgium, Finland, France, Germany and the Netherlands). The results indicate that real time uncertainty substantially affects fiscal planning. Ex ante fiscal plans have generally been long-term oriented and counter-cyclical in the euro area, but in the periphery countries policies have been more sensitive to economic cycles and less long-term oriented than in the other countries. We find evidence that high indebtedness in the periphery countries cannot be explained by short-term pro-cyclical ex ante fiscal planning. Instead, high initial debt ratios, policy changes after the budget-planning stage and cumulated macroeconomic imbalances have contributed substantially to accumulated debt ratios. Overall, reliable statistics, balanced macroeconomic developments and longer-term policy orientation, which are central in the new EU fiscal framework, are crucial for sound and sustainable public finances.

1 Introduction . 10 2 Alternative models for optimal price setting 16 2.1 Basic model with endogenous supply 17 2.2 Optimal price setting models . 21 2.2.1 Optimal price setting with fully flexible prices 21 2.2.2 Optimal non-overlapping price setting with nominal rigidities . 23 2.2.3 Optimal overlapping price setting with nominal rigidities . 26 3 Three Phillips curve relationships 28 3.1 The New Classical Phillips curve 29 3.2 The New Keynesian Phillips curve 31 3.3 The Hybrid Phillips curve 34 4 Related studies 36 5 Review of the articles 41 References 44

This paper examines inflation dynamics in Europe. Econometric specification tests with pooled European data are used to compare the empirical performance of the New Classical, New Keynesian and Hybrid specifications of the Phillips curve. Instead of imposing any specific form of expectations formation, direct measures, ie Consensus Economics survey data are used to proxy economic agents' inflation expectations. According to the results, the New Classical Phillips curve has satisfactory statistical properties. Moreover, the purely forward-looking New Keynesian Phillips curve is clearly outperformed by the New Classical and Hybrid Phillips curves. We interpret our results as indicating that the European inflation process is not purely forward-looking, and inflation cannot instantaneously adjust to changes in expectations. Consequently, even allowing for possible non-rationality in expectations, a lagged inflation term enters the New Keynesian Phillips curve for inflation dynamics in Europe.