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Recently, a number of studies have made an attempt to deal with the key issue of the incompleteness of information available to the central bank when taking its monetary policy decisions. This study adds to this literature by tackling the problem with regard to the euro area. The analysis is based on the simplistic assumption of the central bank following a simple monetary policy rule ?-la-Taylor. Along the lines of work suggested by Orphanides, the study tries to assess whether estimates of reaction functions which are carried out using revised data for the euro area can convey a misleading message in terms of policy recommendations.

The theoretical determinants of maximum sustainable government debt are investigated using Diamond's overlapping generations model. A level of debt is defined to be 'sustainable' if a steady state with non‐degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists, and it normally occurs where variables such as capital are in the interiors, rather than at the limits, of their economically feasible ranges. This leads to a situation where, when debt is at its maximum, a further infinitesimal increase in debt causes a 'catastrophe', i.e. the economy embarks on a path of unchecked capital decumulation.

AbstractThe analysis of monetary developments has always been a cornerstone of the ECB's monetary analysis and, thus, of its overall monetary policy strategy. In this respect, money demand models provide a framework for explaining monetary developments and assessing price stability over the medium term. It is a well‐documented fact in the literature that, when interest rates are at the zero‐lower bound, the analysis of money stocks become even more important for monetary policy. Therefore, this paper re‐investigates the stability properties of M3 demand in the euro area in the light of the recent economic crisis. A cointegration analysis is performed over the sample period 1983 Q1 and 2015 Q1 and leads to a well‐identified model comprising real money balances, income, the long‐term interest rate and the own rate of M3 holdings. The specification appears to be robust against the Lucas critique of a policy dependent parameter regime, in the sense that no signs of breaks can be found when interest rates reach the zero‐lower bound. Furthermore, deviations of M3 from its equilibrium level do not point to substantial inflation pressure at the end of the sample. Excess liquidity models turn out to outperform the autoregressive benchmark, as they deliver more accurate CPI inflation forecasts, especially at the longer horizons. The inclusion of unconventional monetary policy measures does not contradict these findings.

Despite the great importance and final success of the convergence process that led to the establishment of the European Monetary Union, there is no clear agreement regarding the monetary policy pursued in the member countries during the convergence process. This paper contributes to the literature with an empirical analysis of the period from 1993 to 1998 that encompasses eleven EMU countries. In particular, Taylor type interest rate rules are estimated with monthly national data to find that, despite certain similarities and exceptions, the rule followed by each country is distinct and differs substantially from the standard Taylor rule. However, for most countries, the parameter estimates reflect the principles proclaimed by the monetary policy authorities and, in addition, it is shown that in most cases the estimated rules reproduce the policy setting quite closely.