21 Pages Posted: 26 Dec 2009
Date Written: December 16, 2009
The EMU assigns a very marginal role to economic policy and relies on the leading idea that, if prices are kept constant, there will be an automatic convergence towards long-run equilibrium income. These beliefs represent the theoretical underpinnings of fiscal and monetary policy strategies in Europe. In order to highlight the weakness of these foundations, the paper evaluates empirically the effects of public expenditure and interest rate setting on equilibrium income in Italy from 1998 to 2008. The analysis supports the conclusions that government spending has a positive impact on national income while inflation targeting has a negative impact. Moreover the empirical evidence shows that a high level of debt does not produce negative effects on GDP. Finally, at a time of financial crisis, these results appear to be reinforced for fiscal policy, but weakened for monetary policy. The paper draws the conclusion that the EMU’s rigid rules for both fiscal and monetary policy have recessive attitudes, and limit the use of instruments to deal with high levels of unemployment, definitely undermining the future existence of the single-currency area.
Keywords: Fiscal Policy, Monetary Policy, EMU
JEL Classification: E12, E52, E62
Suggested Citation: Suggested Citation
Napolitano, Oreste and Canale, Rosaria Rita, The Recessive Attitude of EMU Policies: Reflections on the Italian Experience, 1998–2008 (December 16, 2009). Available at SSRN: https://ssrn.com/abstract=1524423 or http://dx.doi.org/10.2139/ssrn.1524423