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How much fiscal backing must the ECB have? The euro area is not (yet) the Philippines

  • Ansgar Belke
  • Thorsten Polleit

This paper gives a detailed explanation of why a central bank without fiscal backing can lose control of inflation. Moreover, it argues that such danger emerged only recently for the ECB due to its increasing quasi-fiscal activities. Finally we argue that it might not generally be a good idea to provide fiscal backing for the ECB. That said, the backing of the central bank’s equity capital by fiscal policy (“fiscal backing”) appears to be a viable strategy if and when the central bank’s accounting losses are not related to the state of public finances. If, however, central bank portfolio losses are a direct outcome of deteriorating public finances, preserving the central bank’s equity capital may lead to a policy of high inflation, possibly above the ECB’s target level.

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File URL: http://www.cepii.fr/IE/rev124/ei124a.htm
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Article provided by CEPII research center in its journal International Economics/Economie Internationale.

Volume (Year): (2010)
Issue (Month): 124 ()
Pages:

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Handle: RePEc:cii:cepiei:2010-4ta
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  1. Ansgar Belke & Niklas Potrafke, 2009. "Does Government Ideology Matter in Monetary Policy? – A Panel Data Analysis for OECD Countries," Ruhr Economic Papers 0094, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
  3. Marvin Goodfriend, 2001. "Why we need an "accord" for Federal Reserve credit policy : a note," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 23-32.
  4. Waller, Christopher J, 1991. "Bashing and Coercion in Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 29(1), pages 1-13, January.
  5. Alan S. Blinder, 2010. "How Central Should the Central Bank Be?," Working Papers 1202, Princeton University, Department of Economics, Center for Economic Policy Studies..
  6. Buiter, Willem H., 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
  7. DI BARTOLOMEO, Giovanni & PAUWELS, Wilfried, 2002. "The issue of instability in a simple policy game between the central bank and the representative union," Working Papers 2002009, University of Antwerp, Faculty of Applied Economics.
  8. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
  9. Vergote, Olivier & Studener, Werner & Efthymiadis, Ioannis & Merriman, Niall, 2010. "Main drivers of the ECB financial accounts and ECB financial strength over the first 11 years," Occasional Paper Series 111, European Central Bank.
  10. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 0909, European Central Bank.
  11. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  12. Coleman, William, 2001. "Is It Possible that an Independent Central Bank Is Impossible? The Case of the Australian Notes Issue Board, 1920-1924," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 729-48, August.
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