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Monetary Integration in Europe PDF

165 Pages·2007·13.067 MB·English
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Studies In Economic Transition General Editors: jens H~lscher, Reader in Economics, University of Brighton; and Horst Tomann, Professor of Economics, Free University Berlin This series has been established in response to a growing demand for a greater understanding of the transformation of economic systems. It brings together theoretical and empirical studies on economic transition and economic development. The post-commun1st transition from planned to market economies is one of the main areas of applied theory because in this field the most dramatic examples of change and economic dynamics can be found. The series aims to contribute to the understanding of specific major economic changes as well as to advance the theory of economic development. The implications of economic policy will be a major point of focus. TItles include: Lucian Cernat EUROPEANIZATION, VARIE11ES OF CAPITAUSM AND ECONOMIC PERFORMANCE IN CENTRAL AND EASTERN EUROPE Irwin Collier, Herwig Roggemann, OUver Scholz and Hom Tomann (editors) WELFARE STATES IN TRANSmON East and west Bruno Dallago and Ichiro Iwasaki (editors) CORPORATE RESTRUcnTRlNG AND GOVERNANCE IN TRANSmON ECONOMIES Bruno Dallago (editor) TRANSFORMATION AND EUROPEAN INTEGRATION The Local Dimension Hella Engerer PRIVATIZATION AND ITS LIMITS IN CENTRAL AND EASTERN EUROPE Property RIghts 10 Transition Saul Estrin, Grzegorz W. Kolodko and MllIca uvaUc (editors) TRANSmON AND BEYOND Hubert Gabrlsch and RQdJger Pobl (editors) EU ENlARGEMENT AND ITS MACROECONOMIC EFFECTS IN EASTERN EUROPE Currendes, Prices, Investment and Competitiveness Oleh Havrylyshyn DIVERGENT PATHS IN POST -COMMUNIST TRANSFORMATION capitalism for All or Capitalism for the Few? lens HOlscher (editor) FINANCIAL TURBULENCE AND CAPITAL MARKETS IN TRANSmON COUNTRIES Jens HOlscher and Anla Hochberg (tditors) EAST GERMANY'S ECONOMIC DEVF.WPMENT SINCE UNIFICATION Domestic and Global Aspects lraj Hoshi, Paul JJ. Wellens and Anna-Wzl~tek-J(ub1ak (editors) INDUSTRIAL COMPE1TIlVENESS AND RESfRUCIlJRING IN ENLARGED EUROPE How AccessIon Countries Catch Up and Integrate In the European Union Mlhaela Kelemen and Monika ((ostera (editors) CRITICAL MANAGEMENT RESEARCH IN EASTERN EUROPE Managing the Transition Emil). Kirchner (editor) DECENTRALIZATION AND TRANSmON IN THE VISEGRAD Poland, Hungary, the Czech Republic and Slovakia David Lane (editor) THE TRANSFORMATION OF STATE SOCIALISM System Change, Capitalism, or Something Else? David Lane and Martin Myant (editors) VARIE11ES OF CAPITAUSM IN POST-COMMUNIST COUNfRIES Tomasz Mlddewlcz ECONOMIC TRANSmON IN CFNfRAL EUROPE AND THE COMMONWEALllf OF INDEPENDENT STATES COUNfRIES Milan Nikolic MONETARY POLICY IN TRANSmON Inflation Nexw Money Supply In Postcommunlst Russia Julle Pellegrin 1lfE POUTlCAL ECONOMY OF COMPETITIVENESS IN AN ENLARGED EUROPE Stanlslav Poloucek (editor) REFORMING 1lfE FINANCIAL SECTOR IN CENTRAL EUROPEAN COUNfRIES G~S.Roblns BANKING IN TRANSmON East Germany after Unification Johannes Stephan ECONOMIC TRANSmON IN HUNGARY AND EASf GERMANY Gradualism and Shock Therapy In Catch-up Development Johannes Stephan (editor) TECHNOLOGY TRANSFER VIA FOREIGN DIRECT INVES1MENT IN CENTRAL AND EASTERN EUROPE Horst Tomann MONETARY INTEGRATION IN EUROPE HansvanZon llfE POUTlCAL ECONOMY OF INDEPENDENT UKRAINE Adalbert Winkler (editor) BANJ<ING AND MONETARY POLICY IN EASTERN EUROPE The First Ten Years Monetary Integration in Europe Horst Tomann palgrave macmillan (I Horst Tomann 2007 Softcover reprint of the hardcover 1st edition 2007 978-0-230-01888-4 All rights reserved. No reproduction. copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted Xlve with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, 0( under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright. Designs and Patents Act 1988. First published 2007 by PALGRAVE MACMILlAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York. N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin's Press, liC and of Palgrave MacmiUan Ltd. Macmillan-is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-28511-2 ISBN 978-0-230-28862-1 (eBook) DOI 10.1057/9780230288621 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. logging. pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British library. A catalog record for this book is available from the library of Congress. 10 9 8 7 6 5 4 3 2 1 16 1S 14 13 12 11 10 09 08 07 Monetary Integration in Europe Horst Tornann For Karin Contents List of Figures, Tables and Boxes ix List of Abbreviations Xl Preface. . . . . . . . . . . . . . . xiii 1 The History of Monetary Integration in Europe 1 1.1 The European Payments Union . . . . . 2 1.2 The Bretton Woods System . . . . . . . 6 1.3 A currency system of 'no commitments' . 9 1.4 The European Monetary System. . . 11 2 Theory of Optimum Currency Areas 17 2.1 Wage rigidity and money illusion .. 20 2.2 The credibility of a common currency. . 23 2.3 Effects of collusion in the labour market 25 3 The Economic and Monetary Union: Institutions and Credibility 33 3.1 The new money constitution . . . . . . . . . . . 34 3.2 Independence, accountability and transparency. 39 3.3 The EMU as a regime of low inflation. . . . . . 44 4 The Monetary Policy Strategy of EMU 49 4.1 How monetary policy affects expenditures and prices 49 4.2 Concepts of monetary policy. . . . . . . . . . . . .. 56 4.3 The performance of the Eurosystem . . . . . . . . .. 63 5 Fiscal Policy Coordination and the Stability and Growth Pact 75 5.1 How fiscal policy affects aggregate demand 76 5.2 Is there a need for a national fiscal policy? 79 vii viii Contents 5.3 The Stability and Growth Pact 81 5.4 Fiscal policy in EMU . . . . . . 84 5.5 The reform debate ...... . 87 6 The EMU and the Wage Bargain 93 6.1 How the wage bargain affects employment and real wages .......................... 95 6.2 Real wage flexibility in the EMU ........... 102 6.3 Interaction of monetary policy and the wage bargain 112 7 Real Convergence in a Monetary Union 121 7.1 Long-term effects of a monetary union . 122 7.2 Wage and price adjustments and the catch-up 124 7.3 Real interest rates and growth divergence. 129 7.4 Policy implications . . . . . . . . . . . 131 8 The New European Monetary System 135 8.1 Basic choices for pre-ins ........ 136 8.2 Features of ERM II . . . . . . . . . . . 141 8.3 The performance of monetary convergence 144 Index. . . . . . . . . . . . . . . . . . . . . . . . 151 List of Figures, Tables and Boxes Figures 1.1 The case of convertible currencies 4 1.2 Bilateral trade agreements . . 5 4.1 A stylised illustration of the transmission mechanism from interest rates to prices 56 4.2 Key ECB interest rates . . . . . . 66 4.3 HICP inflation .......... 67 4.4 M3 growth and the reference value 68 4.5 Real GOP, industrial production and industrial con- fidence for the euro area . . . . . . . . . . . . . . .. 70 4.6 Nominal effective exchange rate of the euro and oil prices. . . . . . . . . . . . . . . . . . . . . . . . . .. 73 4.7 Indicators of long-term inflation expectations in the euro area. . . . . . . . . . . . . . . . . . . . . . . 73 5.1 Fiscal stance and cyclical conditions in EU Member States, 2004 . . . . . . . . . . . . . . . . . . . . . .. 85 6.1 Unemployment rates in Europe and the United States 103 8.1 The nominal exchange rate of the zloty ........ 146 ix

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