IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v83y2016icp40-63.html
   My bibliography  Save this article

On the sources of macroeconomic stability in the euro area

Author

Listed:
  • Avouyi-Dovi, Sanvi
  • Sahuc, Jean-Guillaume

Abstract

In the mid-1990s the euro area experienced a change in macroeconomic volatility. Around the same time, at business cycle frequencies the correlation between inflation and money growth changed markedly, turning from positive to negative. Distinguishing the periods pre- and post-1994, we estimate a dynamic stochastic general equilibrium model with money for the euro area. The model accounts for the salient facts. We then perform several counterfactual exercises to assess the drivers of these phenomena. The moderation of real variables was essentially due to relatively smaller shocks to investment, wage markups and preferences. The apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti-inflationary and gradual monetary policy.

Suggested Citation

  • Avouyi-Dovi, Sanvi & Sahuc, Jean-Guillaume, 2016. "On the sources of macroeconomic stability in the euro area," European Economic Review, Elsevier, vol. 83(C), pages 40-63.
    • Handle: RePEc:eee:eecrev:v:83:y:2016:i:c:p:40-63
    DOI: 10.1016/j.euroecorev.2015.11.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292115001932
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2015.11.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jean‐Guillaume Sahuc & Frank Smets, 2008. "Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium‐Scale DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 505-521, March.
    2. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
    3. Angeloni, Ignazio & Dedola, Luca, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 4, European Central Bank.
    4. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
    5. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    6. Martina Cecioni & Stefano Neri, 2011. "The monetary transmission mechanism in the euro area: has it changed and why?," Temi di discussione (Economic working papers) 808, Bank of Italy, Economic Research and International Relations Area.
    7. Robert E. Lucas, 2014. "Liquidity: meaning, measurement, management," Review, Federal Reserve Bank of St. Louis, vol. 96(3), pages 199-212.
    8. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
    9. Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
    10. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-641, June.
    11. Ireland, Peter N, 2004. "Money's Role in the Monetary Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 969-983, December.
    12. Ohanian, Lee E. & Raffo, Andrea, 2012. "Aggregate hours worked in OECD countries: New measurement and implications for business cycles," Journal of Monetary Economics, Elsevier, vol. 59(1), pages 40-56.
    13. Reynard, Samuel, 2004. "Financial market participation and the apparent instability of money demand," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1297-1317, September.
    14. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series 1027, European Central Bank.
    15. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-1014, December.
    16. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    17. Canova, Fabio & Gambetti, Luca, 2009. "Structural changes in the US economy: Is there a role for monetary policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 477-490, February.
    18. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, vol. 101(1), pages 109-128, February.
    19. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    20. Dr. Samuel Reynard, 2006. "Money and the Great Disinflation," Working Papers 2006-07, Swiss National Bank.
    21. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
    22. Jondeau, Eric & Sahuc, Jean-Guillaume, 2008. "Testing heterogeneity within the euro area," Economics Letters, Elsevier, vol. 99(1), pages 192-196, April.
    23. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    24. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
    25. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    26. Javier Andrés & J. David López-Salido & Javier Vallés, 2006. "Money in an Estimated Business Cycle Model of the Euro Area," Economic Journal, Royal Economic Society, vol. 116(511), pages 457-477, April.
    27. McAdam, Peter & Willman, Alpo, 2013. "Medium Run Redux," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 695-727, June.
    28. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2011. "Sources of macroeconomic fluctuations: A regime‐switching DSGE approach," Quantitative Economics, Econometric Society, vol. 2(2), pages 251-301, July.
    29. José Dorich, 2009. "Resurrecting the Role of Real Money Balance Effects," Staff Working Papers 09-24, Bank of Canada.
    30. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    31. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    32. Cochrane, John H., 2014. "Monetary policy with interest on reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 74-108.
    33. Angeloni,Ignazio & Kashyap,Anil K. & Mojon,Benoît (ed.), 2003. "Monetary Policy Transmission in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521828642, September.
    34. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
    35. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    36. Peter van Els & Alberto Locarno & Benoît Mojon & Julian Morgan, 2003. "New Macroeconomic Evidence on Monetary Policy Transmission in the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 720-730, 04/05.
    37. Laura González Cabanillas & Eric Ruscher, 2008. "The Great Moderation in the euro area: What role have macroeconomic policies played ?," European Economy - Economic Papers 2008 - 2015 331, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    38. Herrera, Ana Maria & Pesavento, Elena, 2005. "The Decline in U.S. Output Volatility: Structural Changes and Inventory Investment," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 462-472, October.
    39. Druant, Martine & Fabiani, Silvia & Kezdi, Gabor & Lamo, Ana & Martins, Fernando & Sabbatini, Roberto, 2012. "Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness," Labour Economics, Elsevier, vol. 19(5), pages 772-782.
    40. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    41. Ehrmann, Michael & Backé, Peter, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 240, European Central Bank.
    42. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.
    43. Luc Everaert & Werner Schule, 2008. "Why It Pays to Synchronize Structural Reforms in the Euro Area Across Markets and Countries," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 356-366, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Patrick Fève & Jean‐Guillaume Sahuc, 2017. "In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(3), pages 704-718, April.
    2. Bussière Matthieu & Sahuc Jean-Guillaume & Pfister Christian, 2020. "The link between money and inflation since 2008 [Le lien entre monnaie et inflation depuis 2008]," Bulletin de la Banque de France, Banque de France, issue 232.
    3. Semih Emre Çekin & Rangan Gupta & Eric Olson, 2021. "The Taylor curve: international evidence," Applied Economics, Taylor & Francis Journals, vol. 53(40), pages 4680-4691, August.
    4. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    5. repec:spo:wpmain:info:hdl:2441/1fsnu13sl59jsautsd9gpjrj59 is not listed on IDEAS
    6. Bruna Santos & Leonardo Costa & Francisca Guedes de Oliveira, 2024. "The Euro Area 12: A Comparative Assessment of Its Member States in the Period 1998–2022," Economies, MDPI, vol. 12(4), pages 1-22, April.
    7. repec:hal:spmain:info:hdl:2441/1fsnu13sl59jsautsd9gpjrj59 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lhuissier, Stéphane, 2018. "The Regime-Switching Volatility Of Euro Area Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 426-469, March.
    2. Patrick Fève & Jean‐Guillaume Sahuc, 2017. "In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(3), pages 704-718, April.
    3. Patrick Fève & Jean-Guillaume Sahuc, 2015. "On the size of the government spending multiplier in the euro area," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 531-552.
    4. E. Jondeau & J-G. Sahuc, 2018. "A General Equilibrium Appraisal of Capital Shortfall," Working papers 668, Banque de France.
    5. Lhuissier, Stéphane & Zabelina, Margarita, 2015. "On the stability of Calvo-style price-setting behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 77-95.
    6. Sarah Mouabbi & Jean‐Guillaume Sahuc, 2019. "Evaluating the Macroeconomic Effects of the ECB's Unconventional Monetary Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 831-858, June.
    7. Jondeau, Eric & Sahuc, Jean-Guillaume, 2022. "Bank capital shortfall in the euro area," Journal of Financial Stability, Elsevier, vol. 62(C).
    8. Barthélemy, Jean & Clerc, Laurent & Marx, Magali, 2011. "A two-pillar DSGE monetary policy model for the euro area," Economic Modelling, Elsevier, vol. 28(3), pages 1303-1316, May.
    9. McCallum, Bennett T. & Nelson, Edward, 2010. "Money and Inflation: Some Critical Issues," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 3, pages 97-153, Elsevier.
    10. Atanas Christev & Yue Kang, 2015. "Money and Inflation: Is Monetary Policy Useful?," Manchester School, University of Manchester, vol. 83, pages 30-50, September.
    11. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series 1027, European Central Bank.
    12. repec:zbw:bofrdp:2010_011 is not listed on IDEAS
    13. Marco Di Pietro & Enrico Saltari, 2018. "Economic Fluctuations in the U.S. and Euro Area: Quantifying the Contribution of Technical Change," Southern Economic Journal, John Wiley & Sons, vol. 85(1), pages 203-216, July.
    14. Castelnuovo, Efrem & Nisticò, Salvatore, 2010. "Stock market conditions and monetary policy in a DSGE model for the U.S," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1700-1731, September.
    15. Efrem Castelnuovo, 2012. "Testing the Structural Interpretation of the Price Puzzle with a Cost-Channel Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(3), pages 425-452, June.
    16. Benoit Mojon, 2007. "Monetary policy, output composition and the Great Moderation," Working Paper Series WP-07-07, Federal Reserve Bank of Chicago.
    17. Efrem Castelnuovo, 2012. "Estimating the Evolution of Money’s Role in the U.S. Monetary Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 23-52, February.
    18. Castelnuovo, Efrem, 2016. "Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 300-314.
    19. C. Cahn & J. Matheron & J-G. Sahuc, 2014. "Assessing the macroeconomic effects of LTROS," Working papers 528, Banque de France.
    20. Patrick Fève & Julien Matheron & Jean‐Guillaume Sahuc, 2010. "Disinflation Shocks in the Eurozone: A DSGE Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2‐3), pages 289-323, March.
    21. repec:zbw:bofrdp:2009_020 is not listed on IDEAS
    22. Negro, Marco Del & Schorfheide, Frank, 2013. "DSGE Model-Based Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 57-140, Elsevier.

    More about this item

    Keywords

    Macroeconomic volatility; Quantity theory of money; Monetary policy; DSGE model; Euro area;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:83:y:2016:i:c:p:40-63. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.