The Rastanews project aims at answering the following questions:
- how the evolving system of economic governance in the EU (including the implementation of the common monetary policy, mechanisms of economic policy coordination and the system of financial market supervision) is likely to affect economic stability in the Union and in individual Member States, taking into account the risks involved and the challenge of solving the debt problem;
- how the evolving system of economic governance is likely to work in practice, given the complex inter-institutional setting which might combine Community and intergovernmental efforts. The research should analyse the integration of the decision making processes of economic governance in Europe and the roles of actors involved at national and EU levels;
- what risks the EU (or the Member States) should absorb, and how the institutional framework can respond to these risks and find solid systemic solutions, including potential debt restructuring;
- how should the relations between the Eurozone countries and other EU Member States be improved, especially in the context of deepening macro-economic integration in the Eurozone.
We think that a convincing reply to such harsh questions can only come through a rethinking of the theoretical and empirical framework over which macroeconomic research has focussed in recent years.
In particular, we find there are three key issues about the working of the macro-economy that deserve deeper investigation: incomplete and informationally inefficient financial markets, the Achille's heel of the consensus DSGE models; heterogeneity in expectations, which should play a fundamental role in explaining the behaviour of asset prices, and the need to overcome the traditional dichotomy between Keynesian (short run) and neoclassical (long run) policy prescriptions.
The different research units will analyse the issues at hand from different perspectives but with the common objective to give rise to a new theoretical and empirical framework, able to give useful policy guidance to the ongoing European reform process.
Work Package 1 will analyze the sources (real exchange rate misalignments, capital flows) and measure the magnitude of regional imbalances within the EMU and the EU. It will study the patterns of post-crisis readjustment in CEECs (current account, internal and external debt) and evaluate the current and the most suitable policy arrangements (fiscal and monetary policy, exchange rate policy) for CEECs which may consider EMU accession. It will collect data to reconstruct the European Financial Network (EFN), in order to evaluate its properties and build Early Warning Systems to study EFN resilience to systemic risk.
Work Package 2 will explore the properties (and exploitation for policy design) of macroeconomic models with heterogeneous expectations with a special focus on the consequences of expectational heterogeneity for the transmission and effectiveness of monetary as well as fiscal policies. The unit will test hypotheses in a controlled laboratory environment.
Work Package 3 will investigate how the interaction between income inequality and household debt shapes the dynamics of economic fluctuations and determines the fragility of the economy's growth pattern with the idea that setting stricter rules to the financial sector is not sufficient in stabilizing economic systems if a complementary reduction of inequality is not implemented.
Work Package 4 will extend standard DSGE models to incorporate limited asset market participation, understand the theoretical implications of limited asset market participation in the EMU and study the interactions between the common monetary policy and the national fiscal policies, including the optimal monetary-fiscal policy mix during the transition to lower debt-to-GDP ratios in the EMU.
Work Package 5 will study the macro-finance interface to construct an Early Warning Indicator System and set up a new large scale econometric framework for the euro area, also developing a new specification for modeling long-term dynamic correlations between financial assets.
Work Package 6 will provide a critical review of the ongoing reforms of the EU (and the Eurozone) economic governance and suggestions for the design of a revised economic governance drawing on results of all the other WPs, with a focus on the potential revision of the ECB strategies/mission.
Work Packages 7 and 8 will disseminate the project's research results and provide the necessary management assistance.