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The sovereign debt crisis and monetary policy

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  • Matheron, J.
  • Mojon, B.
  • Sahuc, J.G.

Abstract

Since Lehman Brothers’ filing for Chapter 11 bankruptcy on September 2008, and as a result of the ensuing financial crisis and worldwide recession, policymakers all across the globe responded with a policy mix to better withstand the potential nefarious effects expected by experts and financial markets alike. The series of unprecedented phenomena since World War II1 resulted in a combination of automatic stabilisers and swift discretionary measures on the fiscal side, and accommodative policy on the monetary front. Yet, over three years later, Europe does not seem more “off the hook” than any major advanced areas; and another crisis has emerged: the sovereign debt crisis. Because most euro area governments failed to abide by the Stability and Growth Pact rules prior to 2008, public indebtedness in the euro area countries has reached such a high level that sustainability and even solvency concerns have emerged, triggering a severe confidence crisis for the euro area periphery. At the same time, monetary policy is now close to its zero lower bound, so that there is little room for maneuver on this front. These are exceptionally dangerous times because the euro area monetary policy now stands at a cross road. On the one hand, the legacy of the Lehman Brothers recession entails inflation risks due to fi scal dominance, central bank losses and the ensuing loss of credibility. On the other hand, it generates severe defl ationary risks. Indeed, financial turmoil triggered by increased sovereign default risks has been conducive to a risk of credit crunch and might have impaired the monetary policy transmission mechanism.

Suggested Citation

  • Matheron, J. & Mojon, B. & Sahuc, J.G., 2012. "The sovereign debt crisis and monetary policy," Financial Stability Review, Banque de France, issue 16, pages 155-167, April.
  • Handle: RePEc:bfr:fisrev:2011:16:15
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    References listed on IDEAS

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    Cited by:

    1. CRISTE Adina & LUPU Iulia, 2013. "The Conflict Relation Between the Sovereign Debt of the Euro Area Countries and the Common Monetary Policy As a Potential Source For Geopolitical Changes," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 167-173, May.
    2. Adina Criste, 2013. "Issues Regarding the Conducting of the Euro Area Monetary Policy during the European Debt Crisis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 9(2), pages 96-106, April.
    3. Moradi, Davood & Rasoulinezhad, Ehsan, 2012. "Logical Forecasting of the Eurozone Crisis through ANP," MPRA Paper 71624, University Library of Munich, Germany.

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