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

Author

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  • Pietro Alessandrini

    (Universit… Politecnica delle Marche, MoFiR)

  • Michele Fratianni

    (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica 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," Mo.Fi.R. Working Papers 113, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    • Handle: RePEc:anc:wmofir:113
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    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.
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    2. A.P. Thirlwall, 2018. "Una vita nell’economia," Moneta e Credito, Economia civile, vol. 71(283), pages 179-210.

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    More about this item

    Keywords

    Eurozone; adjustment mechanism; external imbalances; 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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