Abstract
In this paper we outline alternative post-Keynesian policy recommendations addressing the problems of differential inflation, divergence in competitiveness and associated current account imbalances within the Euro area. We provide a basic framework in order to systematically address the related issues making use of Anthony P. Thirlwall?s (1979, 2002) model of a ?balance-of-payments-constrained growth rate? (BPCGR). Based on this framework, we outline the required stance for alternative economic policies and then we discuss the implications for alternative monetary, wage/incomes and fiscal policies in the Euro area as a whole, as well as the consequences for structural and regional policies in the Euro area periphery, in particular.
Highlights
In this paper we have provided alternative post-Keynesian policy recommendations addressing the problems of differential inflation, divergence in competitiveness and associated current account imbalances within the Euro area
We have argued that the major purpose of these alternative policy proposals should be to generate sustainably high demand and output growth in the Euro area as a whole, providing high levels of non-inflationary employment, as well as preventing “export-led mercantilist” and “debt-led consumption boom” types of development, both within the Euro area and with respect to the role of the Euro area in the world economy
We have argued that monetary policies of the European Central Bank (ECB) should refrain from finetuning output and inflation but should target low real interest rates, focus on financial stability and should convincingly act as lender of last resort, both for the banking system and for the Euro area member country governments
Summary
We chose Thirlwall’s (1979, 2002) model of a BPCGR as a starting point for the presentation of post-Keynesian alternatives to curb macroeconomic imbalances in the Euro area, because this model allows for a systematic and consistent discussion of the interrelationships between current account balances, inflation differentials and non-price competitiveness. From an economic policy perspective, we can distinguish two different causes for countries growing “too fast” relative to their BPCGR - catch-up processes associated with high investment in productive capital, on the one hand, and bubble-induced growth associated with asset and/or housing price booms and high investment in real estate and/or high debt-financed consumption, on the other hand. Member States” (Treaty on European Union 2010, Article 3.3), the latter should be avoided by appropriate economic policies and institutions From another angle we could argue that the BPCGR are “too low” or “too high” given the actual growth rates of the respective economies. For given growth differentials within a currency union, we will observe current account imbalances if income elasticities of demand for exports of rapidly growing catching-up countries are “too low” and income elasticities of demand for imports are “too high”, reducing the BPCGR below the actual growth rate. Growing mature economies will contribute to imbalances if the reverse holds true, that is “too high” income elasticities of the demand for their exports and “too low” income elasticities of their demand for imports, lifting the BPCGR above the actual growth rate
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