Working Paper: CEPR ID: DP711
Authors: Tamim A. Bayoumi; Mark P. Taylor
Abstract: We analyse the importance of ERM membership for macroeconomic performance by comparing the behaviour of real output growth and inflation of members and non-members of the ERM. Taking the traditional aggregate supply and demand model as the basis for the analysis, we propose and implement an econometric procedure for identifying aggregate demand and supply shocks. The results confirm that the ERM has acted as a vehicle for macroeconomic policy coordination among its members. We also investigate several issues relating to the notion of a `tri-polar' global economic system comprising Germany, Japan and the US.
Keywords: ERM; macroeconomic performance; tripolarity
JEL Codes: F33; F62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Membership in the ERM (F33) | Convergence in macroeconomic performance among member countries (F62) |
| ERM (Y60) | More similar responses to shocks among member economies (F41) |
| Aggregate demand shocks (E00) | Temporary effects on output (F69) |
| Supply shocks (E39) | Permanent effects on output (F69) |
| ERM (Y60) | Increased correlation in output and price responses to shocks (E39) |