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Long-run Growth and Short-run Stabilization

Essays in Memory of Albert Ando

Edited by Lawrence R. Klein

There is much confusion in the economics literature on wage determination and the employment–inflation trade-off. Few model builders pay as much careful attention to the definition and meaning of long-run concepts as did Albert Ando. Expanding on years of painstaking work by Ando, the contributors elaborate on the main issues of economic analysis and policies that concerned him.
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Chapter 7: The Euro and the Transmission of Monetary Policy

Ignazio Angeloni and Michael Ehrmann


* Ignazio Angeloni and Michael Ehrmann 1. INTRODUCTION AND SUMMARY Monetary policy transmission in Europe has become a much more interesting research subject lately. Economic and monetary union (EMU) is a major institutional reform, likely to change the European economy in many ways. The monetary policy transmission process (MTP) – the set of links through which monetary policy affects the economy – is a central element in this transformation. While these changes unfold, and before they are even fully understood, the European Central Bank (ECB) needs the best available information on how transmission works in the new arrangement in order to conduct its policy. Not surprisingly, research on this subject has intensified since 1999. In this chapter we attempt a first assessment of the nexus between EMU1 and the euro area transmission process, using the most recent data. At least since Lucas’s celebrated ‘critique’, it has been recognized that regime changes impact on the expectations formation mechanisms and hence on the economy’s response to policy. It is hard to think of examples where this line of reasoning could apply more forcefully than EMU. However, it is important to bear in mind that EMU is a process, not a one-time event. The transition to a new currency and monetary policy was something economic agents had time to prepare for, and adjust to, over a number of years. This complicates significantly the task of identifying causal links. In any event, there are several related questions, only partly of causal nature, that we...

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