Working Paper: CEPR ID: DP2192
Authors: Hans Peter Gruner
Abstract: This paper studies the strategic interaction of Euroland's national macroeconomic players and the ECB council under two alternative assumptions on central bank behavior: (i) all members of the ECB council are concerned about Euroland's macroeconomic aggregates and (ii) the ECB council is composed of national central bankers who are mainly concerned about domestic macroeconomic conditions. Under the former assumption monetary policy can be used to impose some discipline on national macroeconomic players at the cost of higher inflation. Under the predominance of national interests however, this trade-off can no longer be exploited. The persistence of national perspectives in the ECB council has an adverse impact on the relationship between key macroeconomic variables such a inflation and unemployment or inflation and the level of government debt.
Keywords: EMU; wage-fiscal discipline; central bank council
JEL Codes: E24; E50; E62; E63; F15; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| National interests dominate (F52) | Adverse impacts on macroeconomic outcomes (F69) |
| All members concerned about macroeconomic aggregates (E10) | Higher inflation (E31) |
| National interests dominate (F52) | Tradeoff between inflation and unemployment can no longer be exploited (E31) |
| Central bankers prioritize domestic conditions (E58) | Suboptimal macroeconomic outcomes (E19) |
| Persistence of national perspectives (F52) | Adverse effects on key relationships (inflation-unemployment, inflation-government debt levels) (E31) |
| Focus on national aggregates (E10) | Fundamental tradeoff between inflation and unemployment disappears (E31) |