No abstract

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or lMf policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.This study identifies differences in the monetary policy transmission mechanism across the countries in the euro area. It is argued that part of the differences in the response of economic activity to monetary policy during the pre-EMU period, found in other studies, reflected differences in monetary policy reaction functions, rather than different transmission mechanisms. In light of this, the paper constructs an empirical model on the basis of common reaction functions. The rcsults confirm that even when a common monetary policy is implemented, its effects on economic activity arc likely to differ across EMU countries. The paper also constructs an aggregate measure of the effect of monetary policy on prices and output. Finally, the paper examines the relative strength ofthc credit, exchange ratc, and interest rate channels of monetary transmission in EMU countries.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMP or IMF policy. Working Papers describe research in progress by the author(s) and are Q!lblished to elicit comments and to further debate.The paper reviews the stability of long-run money demand in the euro area in the light of recent revisions to M3 data. The analysis confirms the existence of a stable long-run money demand, although the estimated equation implies a smaller equilibrium M3 growth than the European Central Bank's reference value of 4" percent. The stability of long-run money demand does not imply that the market is always in equilibrium. Indeed, it is argued that periods of disequilibrium can be long and adjustment slow. The paper shows that the difference between the low estimated equilibrium growth rate and the actual growth rate for M3 can be explained by a velocity shock, identified here as the sharp fall in equity prices in the last two years. These characteristics of the money marketsummarized in the events of the last two years-would call for an alternative approach in the communication of monetary policy developments, essentially putting less emphasis on month-tomonth developments in M3.

Government wage, benefit, and employment decisions are not taken on a profit‐maximizing basis, and have a substantial impact on aggregate labour market performance and unemployment. In a two‐sector labour market model with free mobility of labour, an increase in government wages or benefits reduces private sector employment, and government employment is not an effective counter‐cyclical instrument. Empirical tests for Greece confirm that the expansion of the public sector in the 1980s contributed to the deterioration of labour market performance.

In this paper we analyse the dynamics of business cycles in the G7 countries. Our aim is to answer the question of whether growth varies (in an absolute sense) over the business cycle, and hence to examine whether the simple two-phase characterization (downturn/upturn) is an appropriate description of the business cycle. To study growth over the cycle, we estimate single-country equations and then a pooled regression that takes into account the important interactions of international business cycles. The results confirm the steepness asymmetry of the growth cycles and show that growth varies systematically within upturns and downturns. These are consistent with the notion of deepness asymmetry which implies that contractions are more pronounced in the later stages of a downturn whereas expansions are stronger immediately after troughs.