FIRE for the Euro: A Superior Way to Bond Market Stabilization
Government bond markets within the euro zone may have fallen victim to a self-fulfilling crisis of confidence. Eurobonds may contribute to stabilization in the short-run but would imply destructive disincentives and incalculable risks for joint and several guarantors. Monetary interest rate equalization through the ECB government bond purchase program poses risks for central bank credibility and price stability. This contribution proposes fiscal interest rate equalization (FIRE) as an alternative. With FIRE, countries that benefit from low interest rates as a consequence of market panics would transfers some of their savings to subsidize the borrowing of crisis countries within a conditional fiscal scheme. The paper presents FIRE’s principles and discusses its advantages over alternative stabilization approaches. Furthermore, a simulation of a FIRE specification is presented which would shield Italy and Spain against interest rates above 5 percent.
Volume (Year): 232 (2012)
Issue (Month): 6 (November)
|Contact details of provider:|| Postal: |
Phone: +49 (0)641 99 22 001
Fax: +49 (0)641 99 22 009
Web page: http://wiwi.uni-giessen.de/home/oekonometrie/Jahrbuecher/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Grauwe, Paul & Ji, Yuemei, 2012. "Mispricing of Sovereign Risk and Multiple Equilibria in the Eurozone," CEPS Papers 6548, Centre for European Policy Studies.
When requesting a correction, please mention this item's handle: RePEc:jns:jbstat:v:232:y:2012:i:6:p:702-709. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Winker)
If references are entirely missing, you can add them using this form.