Dynamic Paths of the European Economy: Simulations with an Aggregate Model of the EMU as a Part of the World Economy

Abstract

The development of the European economy is a subject of remarkable interest in the current debate on the world economy. The performance of the Economic and Monetary Union (EMU) in terms of growth and unemployment is still unsatisfactory in comparison with that of the United States and of the European non-EMU countries, especially the United Kingdom. This has led some authors to investigate the existence of a deflationary bias in EMU monetary and fiscal policy rules (see for instance Altavilla and Marani, 2002). What is probably more significant, the concern that a restrictive monetary policy from the ECB might hinder the weak recovery of the EMU is shared by multilateral agencies such as the OECD (see Cotis, 2003) and the IMF (see chapter 1 and figure 1.5 in IMF, 2003).

The author thanks Francesco Carlucci and the participants at the European Union session of the IEA Congress (Lisbon, September 2002) for their helpful comments. Research assistance by Valeria Perotti and Antonio Pesce is gratefully acknowledged. This work was partially funded by the University of Rome ‘La Sapienza’ (research project on Institutions, Growth and International Coordination) and its Faculty of Economics (research project on The Linkage of Macroeconometric Models for International Economic Policy Simulation).