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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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    Cited by:

    1. Reichlin, Lucrezia & Ricco, Giovanni & Tarbé, Matthieu, 2023. "Monetary–fiscal crosswinds in the European Monetary Union," European Economic Review, Elsevier, vol. 151(C).
    2. Athanasios Orphanides, 2020. "The fiscal–monetary policy mix in the euro area: challenges at the zero lower bound," Economic Policy, CEPR;CES;MSH, vol. 35(103), pages 461-517.
    3. Duchi, Fabio & Elbourne, Adam, 2016. "Credit supply shocks in the Netherlands," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 51-71.
    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. Kouretas, Georgios P. & Papadopoulos, Athanasios P. & Tavlas, George S., 2022. "Financial risks, monetary policy in the QE era, and regulation," Journal of Financial Stability, Elsevier, vol. 63(C).
    6. Patella, Valeria & Tancioni, Massimiliano, 2021. "Confidence Swings and Sovereign Risk Dynamics," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 195-206.
    7. 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.
    8. van Riet, Ad, 2015. "Market-preserving fiscal federalism in the European Monetary Union," MPRA Paper 77772, University Library of Munich, Germany.
    9. Tanweer Akram, 2021. "A Note Concerning the Dynamics of Government Bond Yields," The American Economist, Sage Publications, vol. 66(2), pages 323-339, October.
    10. Adam Elbourne & Fabio Duchi, 2016. "Credit Supply Shocks in the Netherlands," CPB Discussion Paper 320, CPB Netherlands Bureau for Economic Policy Analysis.
    11. Martin Geiger & Richard Hule, 2019. "Correlation and coordination risk," Annals of Finance, Springer, vol. 15(2), pages 155-177, June.
    12. Orphanides, Athanasios, 2016. "Fiscal Implications of Central Bank Balance Sheet Policies," CEPR Discussion Papers 11383, C.E.P.R. Discussion Papers.
    13. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2019. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union," European Journal of Political Economy, Elsevier, vol. 57(C), pages 22-33.
    14. repec:ecb:ecbdps:20162 is not listed on IDEAS
    15. Mackowiak, Bartosz & Corsetti, Giancarlo & Dedola, Luca & Schmidt, Sebastian & Jarocinski, Marek, 2017. "Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe’s Monetary Union," CEPR Discussion Papers 12371, C.E.P.R. Discussion Papers.
    16. Duchi, Fabio & Elbourne, Adam, 2016. "Credit supply shocks in the Netherlands," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 51-71.
    17. Landau, J.P., 2012. "Policies on sovereign debt," Financial Stability Review, Banque de France, issue 16, pages 191-201, April.
    18. Aimola Akingbade U. & Odhiambo Nicholas M., 2020. "Public Debt and Inflation: A Review of International Literature," Folia Oeconomica Stetinensia, Sciendo, vol. 20(1), pages 9-24, June.
    19. 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.
    20. Ashoka Mody, 2015. "Living (dangerously) without a fiscal union," Working Papers 875, Bruegel.
    21. Martin Geiger & Richard Hule, 2016. "Correlation and coordination risk," Working Papers 2016-19, Faculty of Economics and Statistics, Universität Innsbruck.
    22. van Riet, Ad, 2016. "Safeguarding the euro as a currency beyond the state," Occasional Paper Series 173, European Central Bank.
    23. Tanweer Akram & Anupam Das, 2017. "The Dynamics Of Government Bond Yields In The Euro Zone," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(03), pages 1-18, September.
    24. Beqiraj, Elton & Patella, Valeria & Tancioni, Massimiliano, 2021. "Fiscal stance and the sovereign risk pass-through," Economic Modelling, Elsevier, vol. 102(C).
    25. Jakob de Haan & Jeroen Hessel & Niels Gilbert, 2014. "Reforming the architecture of EMU: Ensuring stability in Europe," DNB Working Papers 446, Netherlands Central Bank, Research Department.

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    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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