THE SGP and the ECB an exercise in asymmetry

David Mayes and Matti Viren ()
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Matti Viren: University of tUrku and Bank of Finland

Journal of Financial Transformation, 2007, vol. 19, 159-175

Abstract: Using panel data for the Euro Area countries in the period since 1972 this paper explores, in the context of a small model of the E.U. economy, the degree to which macroeconomic policy has been asymmetric. It shows in particular that monetary policy has been much more responsive to threats that inflation would lie outside the price stability target than to equal sized shocks within the target zone. Similarly monetary policy has responded to threats of large positive and negative output gaps but has remained largely unresponsive to smaller divergences. It thus appears that the ECB and its predecessors have been avoiding ‘fine-tuning’ but have been aggressive in responding to substantial threats to macroeconomic stability. In the light of this finding one can reflect on the asymmetries in the Stability and Growth Pact (SGP) that imposes penalties on excessive budgetary deficits. This paper examines the sense of the SGP, as revised in March 2005, in light of these findings, and the role the ECB plays vis-à-vis these policies. In particular it considers the new provisions for behavior in 'good times' and improved governance.

Keywords: Asset prices; Monetary policy; European Union (search for similar items in EconPapers)
JEL-codes: E21 E31 E32 E43 E52 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:0855

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