Session 3

Question 1

What are the Maastricht Convergence Criteria?

Answer 1

• Inflation
• Long term interest rate
• Exchange rate mechanism membership
• Budget deficit
• Public debt

Question 2

Define the inflation convergence criteria

Answer 2

Inflation should not to exceed by more than 1.5 per cent the average of the three lowest inflation rates among EU countries

Question 3

Define the long-term interest rate convergence criteria

Answer 3

It helps guarantee an uniform environment, and that’s how they embed future inflation expectation
not to exceed by more than 2 per cent the average interest rate in the three lowest inflation countries.

Question 4

Define the exchange rate mechanism membership

Answer 4

Convinces the exchange markets and to anchor exchange rates before firing the parity.
At least two years in ERM without being forced to devalue

Question 5

Define the budget deficit convergence criteria

Answer 5

Deficit less than 3 per cent of GDP

Question 6

Define the public debt convergence criteria

Answer 6

Debt less than 60 per cent of GDP, or decreasing at a sufficiently fast pace

Question 7

What is the characteristic of these convergence criteria?

Answer 7

They are nominal, that means the intermediate target of stable inflation and public finances allow to focus on structural reforms and on the supply side

Question 8

What is the European system of central banks made of?

Answer 8

The European Central Banks and all the National Central Banks of the EU.

Question 9

What is the Eurosystem?

Answer 9

The ECB and the National Central Banks of euro area member countries.

Question 10

What is the primary objective of the ESCB?

Answer 10

Maintain price stability, and then support general economic policies in the Community

Question 11

What are the economic objectives of the EU

Answer 11

High level of employment and sustainable and non-inflationary growth.

Question 12

Does the Eurosystem have a target (before 2021)?

Answer 12

Their target is to maintain inflation rates below but close to 2% over the medium term. It left room for interpretation.

Question 13

What are the channels of monetary policy?

Answer 13

• Long run interest rates
• Credit
• Asset prices/ exchange rate

Question 14

What channel of monetary policy does te central bank control?

Answer 14

The different channels are all beyond the central bank control. It can only affect the very short term interest rate (European Over Nigt Index Average) through REPO and Lending Facility. This means that the central bank only indirectly affects interbank rates, and even more so credit conditions to households and firms.

Question 15

What are arguments in favour for central bank independence?

Answer 15

Government do not really resist to the printing press temptation, so central banks don’t have to handle such pressure.

Question 16

What are arguments against central bank independence?

Answer 16

• Not held accountable, so maybe issue of democratic deficit

Question 17

Define fiscal policy

Answer 17

It’s a set of macroeconomic policies aimed at impacting the macroeconomic outcome of the economy through:

• revenues of the government
• expenditures of the government

Question 18

What is the role of fiscal policy?

Answer 18

• Provision of public goods
• Collective insurance
• Macroeconomic stabilisation
• Redistribution

Question 19

Define government deficit

Answer 19

Difference between government expenditures and revenues

Question 20

Define public debt

Answer 20

Stock of cumulated deficits

Question 21

Define primary deficit or surplus

Answer 21

Government deficit or surplus net of interest payments

Question 22

Define the output gap

Answer 22

Difference between actual and potential output

Question 23

Define structural or cyclically adjusted deficit

Answer 23

What the balance would be if the output gap were zero

Question 24

What are automatic stabilisers?

Answer 24

Things that happen with no decision, no lag, as a countercyclical phenomenon.

• Tax receipt decline when the economy slows down
• Welfare spending rises when the economy slows down.

Question 25

What are the reasons for the consensus ban on fiscal policy?

Answer 25

• Technical reasons : decisions lag and implementation lag
• Political reasons :
  difficult to revise decisions when circumstance changes, different goals for these policies

Question 26

Why is monetary policy the preferred tool?

Answer 26

No lags and technocratic approach that has no political biases and long-term view

Question 27

On what grounds can supranational rules be justified?

Answer 27

• spillovers

- Credibility

Question 28

Define the Stability and Growth Pact

Answer 28

Meant to avoid discretion and only allow for automatic stabilisation
There is a requirement to attain a position of close to balance or in surplus in the medium run.

Question 29

How does the Stability and Growth Pact work?

Answer 29

Limit on acceptable deficits
A preventive arm : stability programs and peer pressure
A corrective arm: early warning and excessive deficit procedure

Question 30

How do the Stability Growth Pact fines work?

Answer 30

The sum is retained from payments from the EU to the country (CAP, structural and cohesion funds)
Imposed every year
if the deficit is corrected within two year, the fine is returned (kind of like a deposit) if not it becomes a fine

Question 31

What are the flag of the SGP?

Answer 31

• Countries usually have deficits above 3% and the sanctions have never been imposed.
• Contributes to policy inertia in the EMU

Question 32

What are the 4 major institutional innovations

Answer 32

• European stability mechanism help countries in trouble
• Banking union
• New fiscal rule under the treaty on stability coordination and governance (Fiscal compact)
• Macroeconomic imbalances procedure