Economic Convergence in a Multispeed Europe
What policies should be pursued by, first, the peripheral countries, like Greece and Eastern Europe, and, second, by the median countries, like Spain, to qualify for monetary union? How should the core countries coordinate their fiscal policies once in a
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Also by E. Karakitsos MACROSYSTEMS: The Dynamics of Economic Policy
Economic Convergence in a Multispeed Europe K. B. Gaynor The Management School Imperial College University of London
and
E. Karakitsos The Management School Imperial College University of London
Forewords by Norbert Kloten
Chairman, Academic Economic Advisory Council German Federal Ministry ofEconomics, Bonn
and Farhan Sharaff
Global Chief Investment Officer, Citibank - Private Bank, New fork
First published in Great Britain 1997 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-25268-8 ISBN 978-1-349-25266-4 (eBook) DOI 10.1007/978-1-349-25266-4 First published in the Uni ted States of America 1997 by
ST. MARTIN'S PRESS, INC.,
Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 ISBN 978-0-312-16534-5 Library of Congress Cataloging-in-Publication Data Gaynor, K. B. Economic convergence in a multi speed Europe / K. B. Gaynor and E. Karakitsos. p. cm. Includes bibliographical references and index. ISBN 978-0-312-16534-5 (cloth) I. European Union countries-Economic policy. 2. Europe-Economic integration. I. Karakitsos, Elias. II. Title. HC240.G32 1996 96-34660 338.94---ie
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229
A1.6 CONCLUSIONS Appendix 1 has introduced the model used in the research and justified the simulation approach adopted. Each equation has been described and put into context vis-a-vis the literature. Consumption and investment are perhaps two of the most important demand-side behavioural equations. Recent theoretical work has led to a wealth of results which should be taken into account when model building. The approach in this book is to incorporate the inßation tax and wealth effects into the determination of private sector income and spending, since these are important variables when considering disinßation for high inflation countries. The background to these functions were analyzed and the actual functional forms used were described and justified. On the supply side, it was explained that the model attempts to endogenize growth of potential output in a simple manner. The alternatives are to have a complicated, estimated model giving full account to the micro-foundations of firm's and household's decisions, or to use a simple time-trend as a proxy. By taking the middle line, and noting that this model is not estimated. growth has been incorporated in a simple, yet plausible manner. The wage-price sector is relatively straightforward. Wages and prices are sticky, since producer prices are determined as a mark-up on a weighted average of import prices and wages. The framework, which encompasses many approaches to explaining sticky prices, for example Taylor's contracts, or frictions in the labour market, but does not attempt to explain the natural rate, or the determ
