A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area

Taiji Harashima

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the mechanism of persistent inflation differentials, current account imbalances, and fiscal deficits in the euro area by constructing a multi-country model in which the optimization behaviors of governments as well as those of households, firms, and the European Central Bank are explicitly incorporated. The model indicates that governments can temporarily adhere to their own intrinsic preferences because fiscal policies are not unified in the euro area. This behavior generates problems, such as inflation differentials, and the stability and growth pact does not appear to be sufficiently effective in preventing such deviations. The results in this paper imply that the balance between national sovereignty and economic stability should be shifted more to the side of stability and that the euro area has to become more politically unified. In addition, the inflation differentials provide clear evidence that inflation acceleration is not caused by monetary policies but by government behavior because monetary policies are unified in the euro area whereas fiscal policies are not.

Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal deficit; Time preference; The European Central Bank; The stability and growth pact (search for similar items in EconPapers)
JEL-codes: E58 E63 F33 N14 O52 (search for similar items in EconPapers)
Date: 2011-01-18
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:28121

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