Working Paper: CEPR ID: DP2832
Authors: Andr Sapir; Marco Buti
Abstract: The main issue in the early years of EMU is one of credibility. On one hand, high exposure to asymmetric shocks and low adaptability (be it in terms of stabilization or adjustment) to both symmetric and asymmetric shocks make the early years of EMU potentially problematic. On the other hand, significant economic differences between EMU countries raise questions regarding the objective of price stability. Credibility-enhancing policy choices may, in the short run, conflict with optimal smoothing of shocks, but are essential to ?ferry? EMU towards its ?steady state?. While a number of uncertainties still hang over the new regime, the Paper finds that the experience of EMU so far is heartening. Although economic divergences skewed on the high side made internal monetary misalignments politically less troublesome, the stability-oriented EMU framework fostered broadly appropriate policy behaviour in terms of both efforts to increase adaptability to shocks and of actual response to observed shocks.
Keywords: EMU; exposure and adaptability to shocks; fiscal and monetary policy; policy coordination
JEL Codes: E42; E50; E61; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structural economic differences among EMU countries (F36) | ability to respond to economic shocks (F41) |
| credibility of the ECB (E58) | effectiveness of policy responses to shocks (E65) |
| short-term stabilization efforts (E63) | long-term credibility (G32) |
| effective policy surveillance (I18) | adaptability to shocks (D84) |
| adaptability to shocks (D84) | credibility of the EMU framework (F36) |
| policy coordination (F42) | economic stability (E63) |