Academic journal article NBER Reporter
European Economic Integration
Twenty-five economists from the United States and Europe met in Cambridge on August 3-4 for a conference on "European Economic Integration: Towards 1992" sponsored by the NBER and the Centre for Economic Policy Research (CEPR). Willem H. Buiter, of NBER, Yale University, and CEPR, organized the following program:
Jeffrey D. Sachs, NBER and Harvard University; and
Xavier Sala-I-Martin, Harvard University, "Federal
Fiscal Policy and Currency Unions: Some Lessons
for Europe from the United States"
Discussant: Willem H. Buiter
Francesco Giavazzi, NBER, University of Bologna,
and CEPR; and Marco Pagano, University of Naples
and CEPR, "Confidence Crises and Public Debt
Discussant: Kenneth Kletzer, Yale University
Clas Wihlborg, Gothenburg University and University
of Southern California, "Exchange Rate
Arrangements for the Transition to a Common Currency"
(jointly with Thomas Willett, University of
Discussant: Vittorio U. Grilli, NBER, Yale University,
Richard E. Baldwin, NBER and Columbia University,
"On the Growth Effects of 1992" (This paper is
described in "International Seminar on
Discussant: David Ulph, University of Bristol and
Rick van der Ploeg, Center for Economic Research,
Tilburg University, and CEPR, "Fiscal Aspects of
Monetary Integration in Europe"
Discussant: Silvio Borner, University of Basel
Damien J. Neven, INSEAD and CEPR, "European
Integration and Trade Flows" (jointly with Lars-Hendrik
Discussant: Alan Winters, University College of North
Wales and CEPR
Vittorio U. Grilli and Nouriel Roubini, NBER and Yale
University, "Financial Integration, Liquidity, and
Discussant: Lars E. O. Svensson, NBER and
University of Stockholm
Sachs and Sala-I-Martin discuss the role of a federal fiscal government in a monetary union. They argue that a monetary union is more likely to survive if it is accompanied by a federal government that redistributes income from positively to adversely shocked regions so as to make nominal exchange rate adjustments less necessary. They find that, within the United States, a one dollar negative shock to the average U.S. region triggers higher federal transfers (between 6 and 10 cents) and lower federal taxes (between 28 and 30 cents), so the decrease in disposable income is only about 62 to 65 cents. Hence, more than one-third of the shock is absorbed by the federal government and most of the action comes from the tax side. They suggest that, without a fiscal union, a European Monetary Union (EMU) is not likely to survive.
Giavazzi and Pagano argue that under free capital mobility, confidence crises can result in devaluations if fiscal authorities can obtain temporary money financing, even when fixed exchange rates are viable. During a crisis, domestic interest rates increase, reflecting the expected devaluation. Rather than selling debt at punitive rates, fiscal authorities may turn to temporary money financing, leading to equilibriums with positive probability of devaluation. These equilibriums can be ruled out if the amount of debt maturing during the crisis is sufficiently small: a condition that can be met by reducing the stock of public debt, lengthening its average maturity, and/or smoothing the time distribution of maturing issues.
Wihlborg analyzes the transition from the current "fixed but adjustable" exchange rate system among most members of the European Community (EC) to an irrevocably fixed system within which a common currency gradually would be substituted for the old national currencies. …