(by Paul De Grauwe and Magdalena Polan, 2003)
We provide evidence indicating that countries with well-developed social security systems do not necessarily face a trade-off between social spending and competitiveness. On average, countries that spend a lot on social needs score well in the competitiveness league. We investigate the importance of a reverse causality from competitiveness to social spending, and find that this is weak. We also present some possible explanations for our empirical finding. Finally, we interpret our findings in the framework of a theoretical model in which risk affects the size of the social sector and in which social spending affects the production function of the private sector.
Download: Globalisation and Social Spending
(by Paul De Grauwe and Marc-Alexandre Sénégas, 2002)
We address the issue of how transmission uncertainty could affect the choice between a federal monetary policy based on national data and one on aggregated data. We find that the uncertainty about the transmission process increases the need to take into account information about national economies in the formulation of optimal monetary policies in a monetary union.
Download: Monetary policy in EMU when the transmission is asymmetric and uncertain
(by Paul De Grauwe)
(by David Begg, Fabio Canova, Paul De Grauwe, Antonio Fatas, Philip R. Lane, CEPR, 2002)
The CEPR Monitoring the European Central Bank (MECB) team brings the research of distinguished academic economists to bear on the issues facing the ECB, with an independent, pan-European and policy-oriented perspective.
In 2001 the ECB faced a sharp deterioration in the economic outlook, both globally and in the euro area. The fourth MECB report describes the challenge for monetary policy and assesses the ECB response. Interest rates fell much less in the euro area than in the US. It is often argued that the ECB cut interest rates both too little and too late. Does this stand up to serious scrutiny? Or should we infer instead that the Fed responded too vigorously, or that the extent of the problem was simply larger in the US?
The principal conclusion of MECB 4 is that the problem was larger in the US. There is some evidence that the ECB was slow to cut interest rates, but that by late 2001 it had made up lost ground. A Fed-in-Frankfurt would not have cut interest rates more, but might have cut them earlier. The report includes suggestions for two main changes which would enhance clarity about how decisions are made, enabling the ECB to take more decisive action in advance of events.
Download: more information
(by Paul De Grauwe, 2002. Published in International Finance)
O. Issing, V. Gaspar, I. Angeloni and O. Tristani. Monetary Policy in the Euro Area, Strategy and Decision-Making at the European Central Bank, Cambridge University Press, 2001, 199pp
Woodward, B: Maestro: Greenspan's Fed and the American Boom. Simon and Schuster, 2000, 270pp.
Download: Central Banking: Art or Science? Lessons from the Fed and the ECB.
(by Yunus Aksoy, Hans Dewachter and Paul De Grauwe, 2002. Published in European Economic Review, 46(3), pp. 443-469)
In this paper we analyse the impact of economic and institutional (ECB decision rules) asymmetries on the effectiveness of monetary policy in Euroland. We consider a model where asymmetric shocks and divergent propagation of shocks in output and inflation are potential causes of tension within the ECB concerning the conduct of common monetary (interest rate) policy. Welfare implications of the alternative decision procedures are discussed.
Keywords: EMU, Linear Feedback Rules, Monetary Stability
JEL Classification Numbers: E52
Download: Do Asymmetries Matter for European Monetary Policy?
(by Paul De Grauwe. Lecture presented at the University of Bolzano, 23 April 2002)
Cultural pessimism is fashionable again. Especially under the influence of the anti-globalist movement, the idea that the market is the enemy of beauty and culture has gained credence. In this view, globalisation leads to uniformisation and the imposition of a corporate culture that is all pervasive and that destroys the local cultures. This thesis has been defended recently by Naomi Klein in her book: Logo.
In this anti-globalist view, we need something else than the market to save art and culture. But governments everywhere have abandoned their responsibility in the defence of culture.
This view is now the prevalent one among anti-globalists, and has a great influence. In my lecture I will present an alternative view in which I will try to define the role of the market and of the state in the arts.
I am going to talk about art as an economist. Thus do not expect a lecture on the essence of art, or the importance of art in our lives. I do believe that art and culture are very important. At least they are in my life. And I am sure in many of your lives.
What I am analysing here are the following questions:
How can we make sure that art with value is being produced? And how can we guarantee best that many people can enjoy it?
Are there certain economic systems that make this easier, and others that complicate this production and consumption of art?
In other words my quest as an economist is to analyse how artists, and art are selected.
Download: The Arts, the Market and the State.
(by Paul De Grauwe and Filip Camerman, 2002)
Multinational Corporations are increasingly seen as excessively big and powerful, and as having dramatically increased in size and power. This perception has led to the view that the big corporations are threatening democratic institutions of the nation-states and that they pervert the cultural and social fabric of countries.
In this paper we analyse the size of multinational corporations and the recent trends in this size. Using Value-Added data (instead of sales) we find that multinationals are surprisingly small compared to the GDP of many nation-states. In addition, if anything, the size of multinationals relative to the size of nations has tended to decline somewhat during the last 20 years. Finally, we argue that there is little evidence that the economic and political power of multinationals has increased in the last few decades.
Download: How Big are the Big Multinational Companies? (this version: January 2002)
(by Paul De Grauwe and Maria Grimaldi. Published at: CESifo Discussion Paper 639, München 2002)
We analyse the workings of a simple non-linear exchange rate model in which agents hold different beliefs about the underlying model. We distinguish between 'chartists' and 'fundamentalists'. The non-linearities in the model originiate from transaction costs and from the existence of non-linear adjustment dynamics in the goods market. We find, first, that the simple non-linear structure of the model is capable of generating a very complex exchange rate dynamics. Second, our model is capable of explaining some empirical puzzles concerning exchange rate behaviour, ie. the 'disconnect' puzzle which says that the exchange rate is disconnected from its underlying fundamentals most of the time and the excess volatility puzzle.
JEL Classification: F31, F37
Download: The Exchange Rate and Its Fundamentals. A Chaotic Perspective.
(by Paul De Grauwe and Tomasz Piskorski, CEPR Discussion Paper 3036, 2001)
The effectiveness of alternative loss functions assigned to the common central bank of a monetary union is studied. The alternative policy objectives are a function of the degree of aggregation of decision variables. We consider, respectively, the policy based on union-wide aggregates and the policy based on national data of the Member States. To assess the performance of two alternative policy objectives in the environment of euroland, we derive the implied optimal feedback rules using the framework similar to those proposed by Rudebush and Svensson (1999). The dynamic simulations within the calibrated model of EMU indicate that the policy based on union-wide aggregates yields stabilization performances that are close to the policy based on national data of the Member States. The main implication of the paper is that the announced monetary policy strategy of the ECB based on the union-wide aggregates may be a reasonable proxy of the optimal rule based on the national data of the Member States
Keywords: ECB, EMU, heterogenous monetary union, loss function, optimal linear feedback rules, and welfare aggregation
JEL Classification: E10, E30, E40 and E50
Download: Union-Wide Aggregates versus National Data Based Monetary Policies: Does it Matter for EMU?
(by Paul De Grauwe and Magdalena Polan; CEPR Discussion Paper 2841, 2001)
Using a sample of about 160 countries over the last thirty years we test for the quantity theory relationship between money and inflation. When analysing the full sample of countries we find a strong positive relation between the long-run inflation and money growth rate. The relation is not, however, proportional. The strong link between inflation and money growth is almost wholly due to the presence of high (or hyper-) inflation countries in the sample. The relationship between inflation and money growth for low inflation countries (on average less than 10% per annum over the last 30 years) is weak. We find that the long-run average inflation and country-specific factors have a significant influence on the strength of the relationship. We also confirm that money growth and output growth are orthogonal in the long-run; i.e. higher growth rates of money do not lead to higher growth rates of output.
Download: Is Inflation Always and Everywhere a Monetary Phenomenon?
(by Paul De Grauwe and Isabel Vansteenkiste, CESifo Discussion Paper 577, München 2001)
test whether the relationship between the nominal exchange rate and the news in
its underlying fundamentals has non-linear features. In order to do so, we
develop a Markov switching model and apply it to a sample of low and high
inflation countries. The empirical analysis shows that for the high inflation
countries the relationship between news in the fundamentals and the exchange
rate changes is stable and significant. This is not the case, however, for the
low inflation countries, where frequent regime switches occur. We develop two
non-linear models that are capable of explaining our empirical findings. A first
model is based on the existence of transaction costs; a second one assumes the
existence of agents using different information to forecast the future exchange
rate. In both cases we find that these simple non-linear models are capable of
replicating the empirical evidence uncovered in this paper.
JEL Classification: F31, F37
Download: Exchange Rates and Fundamentals: A Non-Linear Relationship?