IDEAS home Printed from https://ideas.repec.org/p/rmn/wpaper/201610.html
   My bibliography  Save this paper

Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?

Author

Listed:
  • Peter Spahn

Abstract

We analyze the benefits and costs of a non-euro country opting-in to the banking union. The decision to opt-in depends on the comparison between the assessment of the banking union attractiveness and the robustness of a national safety net. The benefits of opting-in are still only potential and uncertain, while costs are more tangible. Due to treaty constraints, noneuro countries participating in the banking union will not be on equal footing with euro area members. Analysis presented in the paper points out that reducing the weaknesses of the banking union and thus providing incentives for opting-in is not probable in the short term, mainly due to political constraints. Until a fully-fledged banking union with well-capitalized backstops is established it may be optimal for a non-euro country to join the banking union upon the euro adoption. Assessing first experiences with the functioning of the banking union and opt-in countries will be crucial for non-euro countries when deciding whether to opt-in.

Suggested Citation

  • Peter Spahn, 2016. "Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?," ROME Working Papers 201610, ROME Network.
    • Handle: RePEc:rmn:wpaper:201610
    as

    Download full text from publisher

    File URL: http://www.rome-net.org/RePEc/rmn/wpaper/rome-wp-2016-10.pdf
    File Function: First version, 2016
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Enrico Spolaore, 2013. "What Is European Integration Really About? A Political Guide for Economists," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 125-144, Summer.
    2. Guido Lorenzoni & Iván Werning, 2019. "Slow Moving Debt Crises," American Economic Review, American Economic Association, vol. 109(9), pages 3229-3263, September.
    3. Cooper, Russell & Kempf, Hubert & Peled, Dan, 2010. "Regional debt in monetary unions: Is it inflationary?," European Economic Review, Elsevier, vol. 54(3), pages 345-358, April.
    4. Sims, S.A., 2012. "Gaps in the institutional structure of the euro area," Financial Stability Review, Banque de France, issue 16, pages 217-223, April.
    5. Eichengreen, Barry, 1989. "The Capital Levy in Theory and Practice," Department of Economics, Working Paper Series qt11j4756b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    6. Eichengreen, Barry, 1989. "The Capital Levy in Theory and Practice," Department of Economics, Working Paper Series qt11j4756b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    7. De Grauwe, Paul & Storti, Claudia Costa, 2001. "Monetary Policy in a Cashless Society," CEPR Discussion Papers 2696, C.E.P.R. Discussion Papers.
    8. Breckenfelder, Johannes & De Fiore, Fiorella & Andrade, Philippe & Karadi, Peter & Tristani, Oreste, 2016. "The ECB's asset purchase programme: an early assessment," Working Paper Series 1956, European Central Bank.
    9. Christopher A. Sims, 2013. "Paper Money," American Economic Review, American Economic Association, vol. 103(2), pages 563-584, April.
    10. Ricardo Reis, 2017. "QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 71-112, April.
    11. Varadarajan V. Chari & Patrick J. Kehoe, 2008. "Time Inconsistency and Free‐Riding in a Monetary Union," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1329-1356, October.
    12. Gerhard Illing & Philipp König, 2014. "Die Europäische Zentralbank als Lender of Last Resort," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 81(24), pages 541-554.
    13. Feld, Lars P. & Köhler, Ekkehard A. & Nientiedt, Daniel, 2015. "Ordoliberalism, pragmatism and the eurozone crisis: How the German tradition shaped economic policy in Europe," Freiburg Discussion Papers on Constitutional Economics 15/04, Walter Eucken Institut e.V..
    14. Helmut Wagner, 2014. "Can We Expect Convergence through Monetary Integration? (New) OCA Theory versus Empirical Evidence from European Integration," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(2), pages 176-199, June.
    15. Philippe Bacchetta & Elena Perazzi & Eric van Wincoop, 2015. "Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?," Cahiers de Recherches Economiques du Département d'économie 15.06, Université de Lausanne, Faculté des HEC, Département d’économie.
    16. Giancarlo Corsetti & Luca Dedola, 2016. "The Mystery Of The Printing Press: Monetary Policy And Self-Fulfilling Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 14(6), pages 1329-1371, December.
    17. Piti Disyatat, 2011. "The Bank Lending Channel Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 711-734, June.
    18. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is It Is Or Is It Ain'T My Obligation? Regional Debt In A Fiscal Federation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1469-1504, November.
    19. Ricardo Reis, 2017. "QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 71-112, April.
    20. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    21. Jean Tirole, 2015. "Country Solidarity in Sovereign Crises," American Economic Review, American Economic Association, vol. 105(8), pages 2333-2363, August.
    22. Hall, Robert, 2015. "Maintaining Central-Bank Financial Stability under New-Style Central Banking," CEPR Discussion Papers 10741, C.E.P.R. Discussion Papers.
    23. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    24. Sebastian Dullien, 2013. "How beneficial are capital inflows for economic catch-up? Lessons from the euro periphery," Competence Centre on Money, Trade, Finance and Development 1308, Hochschule fuer Technik und Wirtschaft, Berlin.
    25. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
    26. Karl Whelan, 2013. "Sovereign default and the euro," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(3), pages 478-501, AUTUMN.
    27. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    28. Giancarlo Corsetti & Luca Dedola, 2012. "The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises," Discussion Papers 1424, Centre for Macroeconomics (CFM), revised Aug 2014.
    29. Paul Krugman, 2014. "Currency Regimes, Capital Flows, and Crises," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 470-493, November.
    30. Dornbusch, Rudi, 1997. "Fiscal Aspects of Monetary Integration," American Economic Review, American Economic Association, vol. 87(2), pages 221-223, May.
    31. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers 159, Cowles Foundation for Research in Economics, Yale University.
    32. Orphanides, Athanasios, 2016. "Fiscal Implications of Central Bank Balance Sheet Policies," CEPR Discussion Papers 11383, C.E.P.R. Discussion Papers.
    33. Martin F. Hellwig, 2014. "Financial Stability, Monetary Policy, Banking Supervision, and Central Banking," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_09, Max Planck Institute for Research on Collective Goods.
    34. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
    35. Paul De Grauwe, 2012. "A Fragile Eurozone in Search of a Better Governance," The Economic and Social Review, Economic and Social Studies, vol. 43(1), pages 1-30.
    36. Buiter, Willem & Rahbari, Ebrahim, 2012. "The ECB as Lender of Last Resort for Sovereigns in the Euro Area," CEPR Discussion Papers 8974, C.E.P.R. Discussion Papers.
    37. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, vol. 86(2), pages 134-138, May.
    38. Barry Eichengreen & Charles Wyplosz, 2016. "Minimal Conditions for the Survival of the Euro," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 51(1), pages 24-28, January.
    39. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
    40. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    41. Olivier J Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2013. "Rethinking Macro Policy II; Getting Granular," IMF Staff Discussion Notes 13/003, International Monetary Fund.
    42. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    2. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2019. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union," European Journal of Political Economy, Elsevier, vol. 57(C), pages 22-33.
    3. Athanasios Orphanides, 2020. "The fiscal–monetary policy mix in the euro area: challenges at the zero lower bound," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 35(103), pages 461-517.
    4. Mackowiak, Bartosz & Corsetti, Giancarlo & Dedola, Luca & Schmidt, Sebastian & Jarocinski, Marek, 2017. "Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe’s Monetary Union," CEPR Discussion Papers 12371, C.E.P.R. Discussion Papers.
    5. Ricardo Reis, 2016. "Can the Central Bank Alleviate Fiscal Burdens?," Discussion Papers 1701, Centre for Macroeconomics (CFM).
    6. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
    7. Jarociński, Marek & Maćkowiak, Bartosz, 2018. "Monetary-fiscal interactions and the euro area's malaise," Journal of International Economics, Elsevier, vol. 112(C), pages 251-266.
    8. Antoine Camous & Russell Cooper, 2019. ""Whatever It Takes" Is All You Need: Monetary Policy and Debt Fragility," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 38-81, October.
    9. Corsetti, Giancarlo & Maeng, Seung Hyun, 2020. "Debt Crises, Fast and Slow," CEPR Discussion Papers 14868, C.E.P.R. Discussion Papers.
    10. Javier Bianchi & Jorge Mondragon, 2022. "Monetary Independence and Rollover Crises," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(1), pages 435-491.
    11. Régis Breton & Mariana Rojas Breu & Vincent Bignon, 2013. "Monetary Union, Banks and Financial Integration," Post-Print hal-01685888, HAL.
    12. Giancarlo Corsetti & Luca Dedola, 2016. "The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 14(6), pages 1329-1371.
    13. Pierpaolo Benigno & Salvatore Nisticò, 2020. "Non-neutrality of Open-Market Operations," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(3), pages 175-226, July.
    14. Galo Nuño & Carlos Thomas, 2015. "Monetary policy and sovereign debt vulnerability," Working Papers 1517, Banco de España.
    15. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69, May.
    16. Giancarlo Corsetti, 2023. "Debt crises, fast and slow Giancarlo," RSCAS Working Papers 2023/15, European University Institute.
    17. Antoine Camous & Russell Cooper, 2014. "Monetary Policy and Debt Fragility," NBER Working Papers 20650, National Bureau of Economic Research, Inc.
    18. Nicola Acocella, "undated". "The theoretical roots of EMU institutions and policies during the crisis," Working Papers 126/14, Sapienza University of Rome, Metodi e Modelli per l'Economia, il Territorio e la Finanza MEMOTEF.
    19. McMahon, Michael & Peiris, M. Udara & Polemarchakis, Herakles, 2018. "Perils of unconventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 92-114.

    More about this item

    Keywords

    currency union; lender of last resort; central bank reserves; central bank budget constraint;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rmn:wpaper:201610. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Albrecht F. Michler (email available below). General contact details of provider: http://www.rome-net.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.