On Monetary Integration and Macroeconomic Policy

Abstract

This thesis contains one general introduction and three separate papers. The papers are fairly heterogeneous with respect to the topics analysed, as well as to the methodologies used. Some common themes, though, are monetary integration and outcomes of macroeconomic policy.

Paper I: “Economic determinants of public opinion about joining the EMU in Sweden and in the UK.” Potential Swedish and/or British memberships in the third stage of the EMU (the currency union) will be determined in referenda. The opinion polls that precede these referenda show strong variability, in particular in the Swedish public opinion over the last five years. In this paper I derive a theoretical model and test it with opinion poll data to establish the economic factors driving the opinions. For Sweden, I find that an increased nominal exchange rate uncertainty makes the opinion more in favor of membership, while the opposite is true for employment uncertainty. In line with the theoretical model, the empirical results for the UK are weaker. The explanation is that the less exposed a country is to foreign trade, the less decisive is currency variability for movements in public support for membership. Similarly, the less rigid an economy is, the less decisive is the real uncertainty.

Paper II: “Nominal Wage Flexibility in a Monetary Union.” Membership in a monetary union reduces the possibilities of counteracting fluctuations in productivity by monetary policy. One condition for entrance not to lead to adverse unemployment performance is that wages are flexible with respect to productivity. In this paper I show that, depending on workers' risk aversion, the incentive for workers to choose more flexible nominal wages may increase after entering a monetary union. The reason is that the abolishment of exchange rates and the common monetary policy increases wage setters utility maximizing preset nominal wages. Assuming that individuals' preferences do not change, the institutional change in monetary policy may induce wage setters to increase wage flexibility.

Paper III: “Partisan differences in Swedish macroeconomic policy.” The purpose of this paper is to trace partisan differences among Swedish governments during the period 1958-2000. According to the Partisan Theory of macroeconomic policy left-wing governments are relatively more concerned with the performance of the real side of the economy (real output and unemployment) as compared to right-wing governments, that place a higher weight on the nominal variables (inflation). Left-wing governments would therefore pursue more expansionary aggregate demand policy, and thereby be willing to risk a higher inflation, in order to improve real economic performance. In this paper we apply the model developed in Hibbs (1994) on Swedish data. Our empirical results support the partisan theory, showing that, ceteris paribus, aggregate demand policy under left-wing governments is relatively more expansionary than under right-wing governments, even if the expansionary policy sometimes leads to higher inflation.