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In the absence of fiscal union, the Eurozone needs a more flexible monetary policy

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  • Pietro Alessandrini, Michele Fratianni

    (Università Politecnica delle Marche and MoFiR; Indiana University, Università Politecnica delle Marche and MoFiR)

Abstract

This paper makes three points. The first is that inter-member external imbalances are a relevant objective for the performance of a monetary union. The second is that policy should aim at reducing inter-member external disequilibria, by setting targets on current-account imbalances applied symmetrically to both deficit and surplus countries. The correction of external imbalances needs to be taken as seriously as that of fiscal imbalances and debt-to-GDP ratios. The third is that, while the principle of the unified supranational monetary policy should remain the core of the monetary union, the heterogeneity in economic performances and current-account imbalances of member states calls for a more flexible common monetary policy. Our specific proposal is that National Central Banks should add a risk premium cost to official interest rates on banks that accumulate “excessive” borrowings or deposits to compensate, respectively, for outflows and inflows of the monetary base due to the effect of external imbalances.

Suggested Citation

  • Pietro Alessandrini, Michele Fratianni, 2015. "In the absence of fiscal union, the Eurozone needs a more flexible monetary policy," PSL Quarterly Review, Economia civile, vol. 68(275), pages 279-296.
    • Handle: RePEc:psl:pslqrr:2015:41
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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/13231/13033
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    References listed on IDEAS

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    1. Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Presbitero, 2014. "External Imbalances and Fiscal Fragility in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 3-34, February.
    2. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
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    6. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
    7. Pietro Alessandrini & Michele Fratianni, 2009. "Resurrecting Keynes to Stabilize the International Monetary System," Open Economies Review, Springer, vol. 20(3), pages 339-358, July.
    8. Andrew Hughes Hallett & Juan Martinez Oliva, 2012. "Reducing Global Imbalances: Can Fixed Exchange Rates and Current Account Limits Help?," Open Economies Review, Springer, vol. 23(1), pages 163-192, February.
    9. Hume, David, 1882. "The Philosophical Works: Essays Moral Political, Literary," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 3, number hume1882c edited by Green, T. H. & Grose, T. H..
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    1. A.P. Thirlwall, 2018. "Una vita nell’economia," Moneta e Credito, Economia civile, vol. 71(283), pages 179-210.
    2. Emanuele Felice & Josep Pujol Andreu & Carlo D'Ippoliti, 2016. "GDP and life expectancy in Italy and Spain over the long run: A time-series approach," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 35(28), pages 813-866.

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    More about this item

    Keywords

    Eurozone; external imbalances; adjustment mechanism; sterilisation.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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