THE SGP and the ECB an exercise in asymmetry

Using panel data for the Euro Area countries in the period since 1972 this paper explores, in the context of a small model of the E.U. economy, the degree to which macroeconomic policy has been asymmetric. It shows in particular that monetary policy has been much more responsive to threats that inflation would lie outside the price stability target than to equal sized shocks within the target zone. Similarly monetary policy has responded to threats of large positive and negative output gaps but has remained largely unresponsive to smaller divergences. It thus appears that the ECB and its predecessors have been avoiding ‘fine-tuning’ but have been aggressive in responding to substantial threats to macroeconomic stability. In the light of this finding one can reflect on the asymmetries in the Stability and Growth Pact (SGP) that imposes penalties on excessive budgetary deficits. This paper examines the sense of the SGP, as revised in March 2005, in light of these findings, and the role the ECB plays vis-à-vis these policies. In particular it considers the new provisions for behavior in 'good times' and improved governance.