One Interest Rate for All - Has the European Central Bank Enough Instruments?
6 Pages Posted: 29 Mar 2011
Date Written: January 2011
This paper explains the European debt crisis not as a result of insufficient fiscal discipline but as the result of a constructional flaw of the EMU. The reason for this flaw are the diverging real interest rates in EMU countries, which trigger self-reinforcing debt-spirals in the presence of non-tradable goods and immobile production factors. The data presented support this view. It is argued that the ECB must employ country specific monetary instruments to cope with this problem.
Keywords: Monetary Policy, Currency Union, European Central Bank, European Debt Crisis, EMU Debt Crisis, Tinbergen Problem
JEL Classification: E52, E58, E62
Suggested Citation: Suggested Citation