Research Discussion Papers, Bank of Finland
Nils Björkstén and Miika Syrjänen
Divergences in the Euro Area: a Cause for Concern?
Abstract: Evidence suggests that after a period of convergence in
the early and mid-1990s, the euro area economies may have started
diverging. As a consequence, the common monetary policy could become
well-suited for a number of countries. This paper studies the extent and
severity of the recent divergences, and discusses the capacity of exposed
countries to compensate for nationally suboptimal monetary conditions
through other policy channels. As a step toward developing an analytical
framework for monitoring intra-euro area developments, we present a
"convergence barometer" to monitor divergences, and a Taylor rule based
"monetary thermometer" to compare the common monetary policy to benchmark
optimal policy for individual countries. A main conclusion is that
policymakers at the euro area level should be concerned about divergences,
since automatic stabilisers alone may not be enough to restore a healthy
equilibrium to potential "outlier" countries.
Keywords: euro; EMU; divergence; Taylor rule; (follow links to similar papers)
34 pages, September 1, 1999
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