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dc.contributor.authorBibow, Jörgen_US
dc.description.abstractAt the start of 1999, a new policy regime was introduced in Europe that included the launch of the euro and the establishment of a centralized controlover monetary policy common to the eleven European Union (EU) countries that decided to participate.(2) The objective of this paper is to assess theexperiences over the new regime's first two years, particularly the performance of the European Central Bank (ECB) in charge of conductingarea-wide monetary policy.The following recent developments in the euro area stand out. On the one hand, economic growth picked up markedly by mid-1999 and employmentgrowth has been quite impressive, meanwhile lowering the rate of unemployment by some three per cent compared to extremely high levels reachedover 1995-7. On the other hand, the new currency's external value had fallen by some 20 per cent up to November 2000 and inflation has increasedfrom its very low level at the start to well above the ECB's declared tolerance level. Conventional wisdom views the former facts as being mainlydriven by changing labor market institutions and wage trends (OECD 1994, 1999; ECB 2000b), and recent declines in unemployment wereaccompanied by downward revisions in NAIRU estimates (OECD 2000b). As regards the latter developments, the euro's plunge and the rise ininflation, there is a tendency to see them as not directly related to monetary policy itself; the tenor being that despite these failures the ECB has donea "good job".The analysis of this paper challenges this view, proposing an alternative interpretation of European growth, price, and labor market performanceover recent years. In contrast to the conventional focus on labor market institutions this paper attributes a key role to demand-side factors as thedriving force behind employment growth. A full assessment would have to also consider the fiscal policy shift to a more neutral stance that occurredin 1998. This paper focuses on monetary policy and the evolution of monetary conditions only. It is argued that the euro's plunge essentially resumedthe trend of D-mark weakness that had started in 1996, introducing "easy money through the back door" as a magnifying factor behind the exportdemand stimulus that lifted Euroland out of the doldrums in 1999. To some extent, the roots of euro weakness thus lie in past: the low-growthlegacies of unsound macro policies inflicted upon Europe over the 1990s. But the ECB made matters worse, first, by failing to communicateeffectively and coherently with financial market participants and, second, by playing against the markets and running into the followingtime-inconsistency problem: attempts to prop up the euro through narrowing the current interest rate spread vis-?-vis the US $ fail if they areperceived by the markets as risking the euro zones growth prospects and hence the sustainability of tighter money in the future. Interest rate hikesmay then weaken rather than strengthen the currency. A more balanced and pro-active attitude toward growth, and medium-term orientation asregards inflation, might have both reduced inflation in the short run and improved growth in the longer run.After discussing some a priori difficulties in assessing the ECB's performance in section 2, the analysis revisits the convergence process of the1990s: section 3 concentrates on monetary conditions in Germany, while section 4 then illustrates that monetary conditions evolved markedlydifferent in some other EU countries. A detailed discussion of the ECB's performance then follows in section 5, at first focussing on the ECB's ongoingcommunication problems, and then turning to the above-mentioned time inconsistency problem. Section 6 concludes.en_US
dc.publisher|aLevy Economics Institute of Bard College |cAnnandale-on-Hudson, NYen_US
dc.relation.ispartofseries|aWorking papers / Bard College, Jerome Levy Economics Institute |x323en_US
dc.subject.stwEuropäische Wirtschafts- und Währungsunionen_US
dc.subject.stwWirtschaftspolitische Wirkungsanalyseen_US
dc.titleEasy Money through the Back Door: The Markets vs. the ECBen_US
dc.typeWorking Paperen_US

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