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Open Economies Review

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

Rotating Slumps in a Monetary Union

  • Oliver LandmannEmail author
RESEARCH ARTICLE

Abstract

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.

Keywords

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

JEL classification

E32 F33 F41 

Notes

Acknowledgement

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.

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Institut für allgemeine WirtschaftsforschungUniversität FreiburgFreiburgGermany

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