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How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK2) and show in closed form that a monetary union shifts the adjustment to a shock horizontally - across countries - within the brackets of the union-wide wealth distribution rather than vertically - that is, across the brackets of the union-wide wealth distribution. Calibrating the model to the euro area reveals that a monetary union alters the impact of shocks most strongly in the tails of the wealth distribution but leaves the middle class almost unaffected.

Part of the present inflation is caused by the breakdown of globalization, in particular supply chains, part is caused by the Corona Pandemic, in particular lockdowns, part is caused by the Ukrainian War, part is caused by European sanctions, and part - and not the smallest one - is caused by the European Central Bank's printing money by hook or by crook in the past and in the presence. This paper attributes inflation decisively to the overwhelming money creation by the European Central Bank.

This paper studies how banks' balance sheets and funding costs interact in the transmission of monetary-policy rates to banks' credit supply to firms. To do so, we use credit-registry data from Germany and Portugal together with the European Central Bank's policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks' funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks' financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks' funding costs reduces their ability to lever up and weakens their lending standards.

The optimal currency literature has stressed the importance of labor mobility as a precondition for the success of monetary unions. But only a few studies formally link labor mobility to macroeconomic adjustment and policy. In this paper, we study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions that share trade links and a common monetary framework., La littérature consacrée aux zones monétaires optimales met en évidence l’importance de la mobilité de la main-d’oeuvre comme condition préalable au succès d’une union monétaire. Toutefois, seulement quelques études établissent un lien formel entre la mobilité de la main-d’oeuvre et les ajustements et politiques macroéconomiques.

The last review of the ECB's monetary policy strategy in 2003 followed a period of predominantly upside risks to price stability. Experience following the 2008 financial crisis has focused renewed attention on the question of how monetary and fiscal policy should best interact, in particular in an environment of structurally low interest rates and persistent downside risks to price stability. This debate has been further intensified by the economic impact of the coronavirus (COVID-19) pandemic. In the euro area, the unique architecture of a monetary union consisting of sovereign Member States, with cross-country heterogeneities and weaknesses in its overall construction, poses important challenges. Against this background, this report revisits monetary-fiscal policy interactions in the euro area from a monetary policy perspective and with a focus on the ramifications for price stability and maintaining central bank independence and credibility. The report consists of three parts. The first chapter presents a conceptual framework for thinking about monetary-fiscal policy interactions, thereby setting the stage for a discussion of specifically euro area aspects and challenges in subsequent parts of the report. In particular, it reviews the main ingredients of the pre-global financial crisis consensus on monetary-fiscal policy interactions and addresses significant new insights and refinements which have gained prominence since 2003. In doing so, the chapter distinguishes between general conceptual aspects - i.e. those aspects that pertain to an environment characterised by a single central bank and a single fiscal authority and those aspects that pertain to an environment characterised by a single central bank and many fiscal authorities (a multi-country monetary union). ...

This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers both from the shock itself and from the ensuing fiscal response. To do so, we use a unifted modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which speciftc modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound ampliftes the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplifted compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption.

We explain how the external counterpart of the euro area M3 can be analysed by using the euro area balance of payments (b.o.p.). This is possible because the net external assets of the monetary financial institutions (MFIs) are present in two statistical frameworks that follow similar conventions: the balance sheet items (BSI) of MFIs and the balance of payments statistics. The first step to including external flows in the monetary analysis is to understand the nature of the flows between resident money holders and the rest of the world. This is possible thanks to the monetary presentation of the b.o.p, which provides information on the nature of external transactions and therefore guidance on the persistence of the monetary signal stemming from external flows. Over the past five years, the increase in the euro area's external competitiveness has given rise to a sustained current account surplus that has consistently supported monetary inflows into the euro area. At the same time, portfolio transactions, which closely reflect financial and monetary policy conditions, have fluctuated significantly, increasing monetary inflows in the period from mid-2012 to mid-2014 and turning them into net outflows during the asset purchase programme (APP) period.

Austria, Finland and Sweden became members of the EU in 1995. This paper examines how support for the euro and trust in the European Central Bank (ECB) have evolved in these three countries since their introduction at the turn of the century. Support for the euro in the two euro-area members Austria and Finland has remained high and relatively stable since the physical introduction of the new currency nearly 20 years ago, while the euro crisis significantly reduced support for the euro in Sweden. Since the start of the crisis, trust in the ECB was strongly influenced by the pronounced increase in unemployment in the euro area, demonstrating that the ECB was held accountable for macroeconomic developments. Our results indicate that citizens in the EU, both within and outside the euro area, judge the euro and the ECB based on the economic performance of the euro area. Thus, the best way to foster support for the euro and trust in the ECB is to pursue policies aimed at achieving low unemployment and high growth.

The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits.

Modern OCA theory has developed different conclusions on when forming a currency union is beneficial. An important pragmatic question in this context is: Did delegating monetary policy to the ECB increase stress in the individual euro area countries? An SVAR analysis reveals that monetary stress has declined more in the euro area than in the euro areas' doppelganger. The synthetic doppelganger is composed of other OECD countries. This result is independent of the identification strategy (sign restrictions/heteroskedasticity/Cholesky). The results can be rationalized by more formalized central banking and the euro becoming a dominant currency.

Durch das Securities Market Programme (SMP) des Eurosystems von 2010 bis 2012 haben alle gewonnen: Das Eurosystem, da durch das SMP die Fragmentierung der Anleihenmärkte des Euroraums verringert und die Transmission der Geldpolitik verbessert werden konnte. Alle Euroländer, da sie Zusatzgewinne ihrer Notenbanken erhielten. Das Marktversagen auf den Finanzmärkten wurde teilweise korrigiert. Die vergangenen und zukünftigen SMP-Gewinne könnten für eine Fiskalkapazität des Euroraums verwendet werden. The Eurosystem's Securities Market Programme (SMP,) the purchase of government bonds of euro area countries strongly affected by the crisis, started in 2010 and ended in 2012. The SMP benefited all parties concerned - the Eurosystem, all euro area countries and the crisis countries. The positive experience with the SMP can be replicated in the private sector with the creation of an exchangetraded fund (ETF), a Smart Beta ETF - SMP Fund. Like the SMP, the SMP Fund would buy government bonds, according to the ECB capital key. As an ETF, the SMP Fund would have low costs. Profi ts above the German Bund benchmark would be shared: 80% to investors, 10% to the SMP Fund and 10% to advisers who recommend the purchase. The related risks would be reduced by the diversifi cation of the SMP Fund, the financing mechanisms of the euro area, especially the European Stability Mechanism (ESM), the Outright Monetary Transactions (OMT) and the banking union. The SMP Fund could support the euro area fi scal capacity and the EU capital markets union. Past and future SMP profits create a fiscal capacity for the euro area with an initial amount of 50 billion Euro.

This chapter examines the evolution of public support for the euro and public trust in the European Central Bank (ECB) during the new currency's first two decades. Using a unique set of opinion poll data that is not available for any other currency, we find that a majority of citizens in every member country of the euro area (EA) support the euro. The economic crisis in the EA following the Great Recession and the euro crisis led to a slight decline in public support for the euro but a sharp fall in trust in the ECB. The recent economic recovery has strengthened support for the euro as well as trust in the ECB. We suggest that support for the euro as a medium of exchange was not strongly affected by the crisis, while trust in the ECB, as the framer of monetary policy, was measurably weakened by the crisis. Our econometric work demonstrates that unemployment is a key driver of support for the euro and its governance. Given these developments, we discuss whether the present levels of support for the euro equip the currency to weather populist challenges in the coming decade.

Zwanzig Jahre nach Gründung des europäischen Währungsraum zieht dieser Wochenbericht mittels einer empirischen Analyse Bilanz. Eine oft gehörte These besagt, dass die Geldpolitik der Europäischen Zentralbank nur schlechter sein kann als die ihrer nationalen Vorgänger, weil die Länder der Eurozone unterschiedlichen Konjunkturzyklen ausgesetzt sind, aber nur ein gemeinsamer Zinssatz für den gesamten Währungsraum festgelegt werden kann. Die hier präsentierte Analyse zeigt aber, dass die einheitliche Geldpolitik der EZB aus der Perspektive der Mitgliedsländer für bessere Konjunkturstabilisierung als die der meisten ihrer nationalen Vorgänger gesorgt hat. Die Geldpolitik ist in Europa auch weitgehend unabhängig von den Wechselkursen geworden. Was die Zentralbank allerdings nicht leisten kann ist, den langfristigen makroökonomischen Ungleichgewichten entgegenzuwirken. Um die Länder des Euroraums besser vor Krisen zu schützen, sollten Reformen der Währungsunion in der Fiskalpolitik und die Vervollständigung der Banken- und Kapitalmarktunion Priorität haben. Um Bestrebungen einer Renationalisierung der Wirtschafts- und Geldpolitik zu adressieren, müssen Fehler in der Krisenbewältigung offen diskutiert werden. Die Geldpolitik der EZB darf nicht zum Sündenbock gemacht werden., DIW Wochenbericht

Am 5. Juni 2019 veranstaltete der Finanzausschuss des Deutschen Bundestags eine offentliche Anhorung zu zwei Antragen der Fraktionen der FDP und der AfD zum Thema „Target“. Die Antrage betonen die Risiken der Target-Salden fur die Bundesbank und untermalen die betriebswirtschaftliche Argumentation mit Warnungen vor einer „Selbstbedienung“ anderer Lander „mit der Notenpresse“ und einem Abfluss von Ressourcen aus Deutschland ohne Gegenleistung. Die Stellungnahme der Autoren gegenuber dem Finanzausschuss kritisiert viele Behauptungen der Antrage zur volkswirtschaftlichen Einordnung der Target-Salden als sachlich falsch.

Twenty years after the introduction of the euro, this Weekly Report uses an empirical analysis to assess the performance of monetary policy in the EMU founding states. It is often claimed that the monetary policy of the European Central Bank (ECB) cannot outperform its national predecessors, as the euro area countries experience different business cycles yet share a common interest rate. However, the present analysis shows that the ECB’s common monetary policy has been more adept at stabilizing the economy than most of its national predecessors from the perspective of the member states. With a common currency, European monetary policy has also become largely independent of exchange rates. However, the central bank is unable to counter long-term macroeconomic imbalances. To protect euro area countries from crises more effectively, priority should be given to reforming the monetary union and fiscal policy as well as to completing the Banking Union and the Capital Markets Union. Mistakes in crisis management must be openly discussed in order to address the temptation some have to renationalize economic and monetary policy; the ECB’s monetary policy should not be a scapegoat., DIW Weekly Report

Die deutsche Diskussion über die Europäische Währungsunion steckt in einer Empörungsfalle. Rechtsnormen und Zahlen werden ungenau und missverständlich wiedergegeben, Kausalzusammenhänge werden nicht belegt. Der Begriff des "Target-Kredits" vermengt volkswirtschaftliche und einzelwirtschaftliche Vorstellungen auf unzulässige Weise und ist analytisch unbrauchbar. Dass die Deutsche Bundesbank in ihrem operativen Geschäft nicht selbständig agiert, wird verdrängt. Eine inhaltliche Auseinandersetzung mit den Aufgaben der Zentralbank fehlt weitgehend. Die Besonderheiten eines deckungslosen Papiergelds werden nicht angemessen berücksichtigt. Die in wiederholten Verlustwarnungen enthaltene Priorisierung fiskalischer Belange ist sachlich verfehlt und ordnungspolitisch gefährlich.

We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative.

In this paper we briefly review the evolution of the Italian economy in the post-war period, discussing the shift from a first period when fiscal policy was targeted - among other things - at full employment, to a later period when controlling inflation through a "foreign discipline" became the main policy target. We review critically the literature on the Italian productivity slowdown, suggesting that it neglects the role of aggregate demand, and of labor market reforms, on productivity. Finally, we discuss Eurozone imbalances, suggesting that Eurozone institutions adopt new rules to keep the interest rate low enough to make public debt sustainable, while using fiscal policy to stimulate growth.

This paper shows that the eurozone payment system does not effectively protect member states from speculative attacks. Suspicion of a departure from the common currency induces a terminal outflow of central bank money in weaker member states. TARGET2 cannot inhibit this drain but only protects central bank assets. Evidence presented here suggests that a run on Italy is already on the way. The paper also considers departure strategies of strong and weak member states and the distributive effects of an orderly eurozone dissolution.

Unilateral euroization is underexplored even in comparison to unilateral dollarization (taken to mean the adoption of the US dollar as legal tender). This paper attempts to partly fill this gap in the literature by investigating the case of Montenegro, which is one of the two countries that have unilaterally adopted the euro as the legal tender. Montenegro's limited monetary policy options make the nature of business cycles important. The evidence presented here suggests that Montenegro has a low degree of synchronization, limited structural similarity, and weak trade integration with the Eurozone. Moreover, there is limited evidence for endogenous structural assimilation following euroization. The case for currency union is weak for Montenegro and appears to be defensible only on grounds of policy credibility.

In the chapter attempts have been taken to assess the potential impact of Polish accession to the euro zone. The analysis covers costs and benefits of monetary integration which are mostly pointed in literature, alluding to the experience of European Union countries. The analysis covers the years 1996-2004. A comparison was made between countries which have adopted the euro in 1999, and those that remained with the national currencies. There are differences between these two groups of countries in increments of GDP per capita, since the introduction of the euro in paper form, despite an earlier convergence of this indicator, however much smaller differences occurred in the case of the inflation rate. Both groups of countries have recorded a significant increase in foreign trade turnover since the inception of the euro area. The data used in the analysis come from the European Statistical Office (Eurostat) and the United Nations Conference on Trade and Development (UNCTAD).

We analyse the welfare properties of progressive income taxes in a stylized DSGE model of a currency union calibrated to the Eurozone. When the central bank follows a standard Taylor rule and volatility originates solely in productivity shocks, we find that considerable welfare gains can be achieved by introducing a progressive income tax schedule. The reason is that the slightly lower average levels of consumption and greater volatility of hours are more than offset in their effects on welfare by a significant reduction in consumption volatility. However, at the aggregate level this result is not robust to the introduction of rule-of-thumb households, but we find a positive welfare effect for the latter type of households while intertemporally optimizing households lose. Furthermore, under an optimal monetary policy, welfare falls even in the absence of rule-of-thumb households. When demand shocks are considered, progressive taxes cannot improve welfare. Increasing tax progression above the Eurozone average is a "beggar-thyself" policy for all specifications.