Wednesday 18 May 2011
In what way was the monetary policy too loose for the PIIGS and what were the consequences?
The PIIGS all have the same problem in that they all have a loss in competitiveness compared to the rest of the EU and countries outside the euro area. The monetary policy set by the ECB (European central bank) did not control inflation in all parts of the euro area. The short term growth created from the policy has caused high inflation. this high inflation cannot cause a reduction in the exchange rate as it is fixed with all the other members. This then causes their domestic products to become uncompetitive which will then increase their trade deficit.
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ReplyDelete"The PIIGS all have the same problem in that they all have a loss in competitiveness compared to the rest of the EU"
Is the REASON behind their loss of competitiveness the same in all countries - and if not, is this important?
You say: "The monetary policy set by the ECB (European central bank) did not control inflation in all parts of the euro area."
Is that true?
You say: "The short term growth created from the policy has caused high inflation."
How?
The ECBs interest rates did not control inflation in all areas you can see this with France's inflation being at 2.2% but Greece's being at 4.3%, would you not agree with a country loosing competitiveness 4.3% inflation is going to do them no good?
ReplyDeleteThe short term growth creates inflation depending on where the economies LRAS is. for example if the economy was on the vertical part of the curve an increase in AD would only increase inflation having no affect on real GDP.