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Gaps in the institutional structure of the euro area

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  • Sims, S.A.

Abstract

The euro was created at a time when the conventional view was that a central bank could control inflation by controlling the money supply and that fiscal policy’s interaction with monetary policy took the form of attempts to get the central bank to finance government debt. With a sufficiently firm and independent central bank, this view considered that financial markets would force discipline on fiscal policy. By creating a strong, independent central bank at the european level, facing multiple country-level fiscal authorities, the threat of political pressures for inflationary finance would be lower than with individual country central banks. We are learning that this formerly conventional view was largely mistaken. In particular, the euro as originally structured seemed to require the elimination of national-level lender of last resort functions for central banks, without creating as strong a replacement at the european level. Having discovered these gaps through experience, what options are there going forward for the euro area? A solution would be to fill in the institutional gaps in the original euro framework. At a minimum, this would require a new institution with at least some taxing power, able to issue debt and to buy, or not buy, the debt of euro area governments. Such an institution would of course have to be subject to democratic control.

Suggested Citation

  • Sims, S.A., 2012. "Gaps in the institutional structure of the euro area," Financial Stability Review, Banque de France, issue 16, pages 217-223, April.
  • Handle: RePEc:bfr:fisrev:2011:16:21
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    References listed on IDEAS

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    1. John H. Cochrane, 1999. "A Frictionless View of U.S. Inflation," NBER Chapters,in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421 National Bureau of Economic Research, Inc.
    2. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    3. C.A. Sims, 1999. "The Precarious Fiscal Foundations of EMU," DNB Staff Reports (discontinued) 34, Netherlands Central Bank.
    4. Christopher A. Sims, 2001. "Fiscal consequences for Mexico of adopting the dollar," Proceedings, Federal Reserve Bank of Cleveland, pages 597-625.
    5. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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    Citations

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    Cited by:

    1. Duchi, Fabio & Elbourne, Adam, 2016. "Credit supply shocks in the Netherlands," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 51-71.
    2. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2016. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe’s monetary union," Working Paper Series 1988, European Central Bank.
    3. repec:nbr:nberch:13968 is not listed on IDEAS
    4. Jarociński, Marek & Maćkowiak, Bartosz, 2018. "Monetary-fiscal interactions and the euro area's malaise," Journal of International Economics, Elsevier, vol. 112(C), pages 251-266.
    5. repec:wsi:afexxx:v:12:y:2017:i:03:n:s2010495217500117 is not listed on IDEAS
    6. van Riet, Ad, 2015. "Market-preserving fiscal federalism in the European Monetary Union," MPRA Paper 77772, University Library of Munich, Germany.
    7. Martin Geiger & Richard Hule, 2016. "Correlation and coordination risk," Working Papers 2016-19, Faculty of Economics and Statistics, University of Innsbruck.
    8. van Riet, Ad, 2016. "Safeguarding the euro as a currency beyond the state," Occasional Paper Series 173, European Central Bank.
    9. J. Boeckx & M. Deroose, 2016. "Monetary and fiscal policies in the euro area : independent but nevertheless connected," Economic Review, National Bank of Belgium, issue ii, pages 7-25, september.
    10. Peter Spahn, 2016. "Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?," ROME Working Papers 201610, ROME Network.
    11. Landau, J.P., 2012. "Policies on sovereign debt," Financial Stability Review, Banque de France, issue 16, pages 191-201, April.

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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