Open Economies Review

, Volume 23, Issue 2, pp 303–317 | Cite as

Rotating Slumps in a Monetary Union

  • Oliver LandmannEmail author


In the decade since its creation in 1999, the European Economic and Monetary Union (EMU) has experienced surprisingly large and persistent inflation differentials across member states causing substantial shifts in relative price levels. At the same time, member countries exhibited distinct non-synchronized output fluctuations, giving rise to a pattern of ‘rotating slumps’ (a term coined by Olivier Blanchard). This paper presents a stylized theoretical model of a monetary union which demonstrates how inflation differentials and relative output movements interact dynamically. A number of implications are derived from the model. In particular, national fiscal policies are shown to have an important role in containing internal macroeconomic disparities in a monetary union. An optimal fiscal policy rule is derived from the model for that purpose.


Monetary union Inflation differentials Cyclical fluctuations Dynamic adjustment Monetary policy Fiscal policy 

JEL classification

E32 F33 F41 



The author acknowledges valuable comments from two anonymous referees and from participants at the 23rd Freiburg/Nagoya Joint Seminar and at research seminars of the Verein für Socialpolitik (Makroökonomischer Ausschuss), the University of Siena, and the Swiss National Bank.


  1. Angeloni I, Ehrmann M (2004) Euro area inflation differentials, European Central Bank Working Paper No. 388, SeptemberGoogle Scholar
  2. Aoki M (1981) Dynamic analysis of open economies. New York.Google Scholar
  3. Beetsma R, Giuliodori M (2010) The macroeconomic costs and benefits of the EMU and other monetary unions: an overview of recent research, Journal of Economic Literature, 48:603–641Google Scholar
  4. Blanchard O (2007a) Adjustment within the euro. The difficult case of Portugal. Portuguese Econ J 6:1–21CrossRefGoogle Scholar
  5. Blanchard O (2007b) A macroeconomic survey of Europe, mimeo, MITGoogle Scholar
  6. Carlin W, Soskice D (2006) Macroeconomics—Imperfections. Institutions and Policies, OxfordGoogle Scholar
  7. Cesaratto S (2010) Europe. German Mercantilism and the Current Crisis, Quaderni del dipartimento di economia politica, Università di Siena, No. 595Google Scholar
  8. Clarida R, Galí J, Gertler M (1999) The science of monetary policy: a new Keynesian perspective. J Econ Lit 37:1661–1707CrossRefGoogle Scholar
  9. De Long B, Summers L (1986) Is increased price flexibility stabilizing? Am Econ Rev 76:1031–44Google Scholar
  10. Dixit A, Lambertini L (2001) Monetary-fiscal policy interactions and commitment versus discretion in a monetary union. Eur Econ Rev 45:977–987CrossRefGoogle Scholar
  11. European Central Bank (2008) European Central Bank—the first 10 years, Special Edition of the Monthly Bulletin, MayGoogle Scholar
  12. European Commission (2008) EMU@10: successes and challenges after 10 years of economic and monetary union, european economy 2Google Scholar
  13. European Economic Advisory Group (2007) The EEAG report on the european economy 2007. MunichGoogle Scholar
  14. Flassbeck H, Spiecker F (2007) Das Ende der Massenarbeitslosigkeit. FrankfurtGoogle Scholar
  15. Gordon R (2008) The History of the phillips curve: an American perspective, keynote address at the Australasian meetings of the econometric society, July 9Google Scholar
  16. Keynes JM (1936) The general theory of employment, interest, and money. LondonGoogle Scholar
  17. Kirsanova T, Vines D, Wren-Lewis S (2005) Fiscal policy and macroeconomic stability within a currency union, mimeo, May 30Google Scholar
  18. Miller M, Sutherland A (1990) The ‘Walters Critique’ of the EMS: a case of inconsistent expectations, CEPR Discussion Paper No. 480, NovemberGoogle Scholar
  19. Roubini N, Parisi-Capone E, Menegatti C (2007) Growth differentials in the EMU: Facts and Considerations, RGE Monitor, JuneGoogle Scholar
  20. Saint-Paul G (2010) Is the euro a failure?, May 5
  21. Spahn H-P (2003) Zum policy-mix in der europäischen währungsunion, hohenheimer diskussionsbeiträge Nr. 226, OctoberGoogle Scholar
  22. Taylor JB (2009) The financial crisis and the policy responses: an empirical analysis of what went wrong. NBER Working Paper No. 14631, January 2009Google Scholar
  23. Tobin J (1975) Keynesian models of recession and depression. Am Econ Rev 65(PP):195–202Google Scholar
  24. Tobin J (1993) Price flexibility and output stability: an old Keynesian view. J Econ Perspect 7(1):45–67Google Scholar
  25. Uhlig H (2002) One money, but many fiscal policies in Europe: what are the consequences? CEPR Discussion Paper No. 3296, AprilGoogle Scholar
  26. van Arle B, Kappler M, Sachs A, Seymen A, Weyerstrass K (2008) Study on economic integration and business cycle synchronisation, Bureau of European Policy Advisers and ZEW, NovemberGoogle Scholar
  27. Walters A (1990) Sterling in Danger. LondonGoogle Scholar
  28. Wickens M (2007) Is the Euro Sustainable? CEPR Discussion Paper No. 6337, JuneGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Institut für allgemeine WirtschaftsforschungUniversität FreiburgFreiburgGermany

Personalised recommendations