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Who is Afraid of Eurobonds?

Author

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  • Bianchi, Francesco
  • Melosi, Leonardo
  • Rogantini Picco, Anna

Abstract

The current Euro Area policy framework exposes its members to the opposite risks of deflation and high inflation because it does not separate the need for short-run macroeconomic stabilization from the issue of long-run fiscal sustainability. We study a new policy framework that addresses this deficiency. A centralized Treasury issues Eurobonds to finance stabilization policies, while national governments remain responsible for the country-level long-term spending programs. The centralized Treasury can run larger primary deficits during recessions, followed by primary surpluses during expansions. However, following an exceptionally large contractionary shock, the centralized Treasury can coordinate with the monetary authority to reflate the economy and avoid the zero lower bound. The policy acts as an automatic stabilizer and removes the risk of deflation. At the same time, the proposed policy framework removes the risk of high inflation and fiscal stagflation because it does not require suspending the fiscal rules designed to preserve long-run fiscal sustainability.

Suggested Citation

  • Bianchi, Francesco & Melosi, Leonardo & Rogantini Picco, Anna, 2023. "Who is Afraid of Eurobonds?," CEPR Discussion Papers 18279, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18279
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    Cited by:

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    2. Afonso, Antonio & Alves, José & Ionta, Serena, 2025. "Monetary policy surprise shocks under different fiscal regimes: A panel analysis of the Euro Area," Journal of International Money and Finance, Elsevier, vol. 156(C).
    3. Michele Andreolli & Hélène Rey, 2024. "Fiscal Consequences of Missing an Inflation Target," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 701-772, June.
    4. Bi, Huixin & Traum, Nora, 2023. "Unconventional monetary policy and local fiscal policy," European Economic Review, Elsevier, vol. 156(C).

    More about this item

    Keywords

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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