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The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound

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  • Orphanides, Athanasios

Abstract

This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the 'safe asset' status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longer-term prospects for the euro area.

Suggested Citation

  • Orphanides, Athanasios, 2017. "The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound," CEPR Discussion Papers 12039, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12039
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    Cited by:

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    2. Philip Arestis, 2019. "The Past and Future of the Euro," Revista de Economía Crítica, Asociación de Economía Crítica, vol. 27, pages 6-15.
    3. Schoenmaker, Dirk, 2019. "Greening monetary policy," CEPR Discussion Papers 13576, C.E.P.R. Discussion Papers.
    4. Stefano Neri & Stefano Siviero, 2018. "The Non-Standard Monetary Policy Measures of the ECB: Motivations, Effectiveness and Risks," Credit and Capital Markets, Credit and Capital Markets, vol. 51(4), pages 513-560.
    5. Bletzinger, Tilman & von Thadden, Leopold, 2021. "Designing QE in a fiscally sound monetary union," European Economic Review, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    collateral eligibility; credit risk.; ECB; Euro crisis; loss sharing; Quantitative easing; redenomination risk; safe assets; Sovereign debt; zero lower bound;
    All these keywords.

    JEL classification:

    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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