On the Sources of Macroeconomic Stability in the Euro Area

Sanvi Avouyi-Dovi and Jean-Guillaume Sahuc

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Abstract: In the mid-1990s the euro area experienced a change in macroeconomic volatility. Around the same time, at business cycle frequencies the correlation between inflation and money growth changed markedly, turning from positive to negative. Distinguishing the periods pre- and post 1994, we estimate a dynamic stochastic general equilibrium model with money for the euro area. The model accounts for the salient facts. We then perform several counterfactual exercises to assess the drivers of these phenomena. The moderation of real variables was essentially due to relatively smaller shocks to investment, wage markups and preferences. The apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti-inflationary and gradual monetary policy

Date: 2016
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Published in European Economic Review, 2016, 83, pp.40-63. ⟨10.1016/j.euroecorev.2015.11.012⟩

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Journal Article: On the sources of macroeconomic stability in the euro area (2016)
Working Paper: On the sources of macroeconomic stability in the euro area (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01612702

DOI: 10.1016/j.euroecorev.2015.11.012

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