In the Absence of Fiscal Union, the Eurozone Needs a More Flexible Monetary Policy: A Reply

PSL Quarterly Review, vol. 69 n. 278, 2016

5 Pages Posted: 18 Jan 2018

See all articles by Pietro Alessandrini

Pietro Alessandrini

Università Politecnica delle Marche - Faculty of Economics

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Date Written: September 12, 2016

Abstract

The authors (A&F) reply to Andrea Terzi’s comment on their previous paper, published in the December 2015 issue of this Review. Andrea Terzi’s two main objections to A&F analysis are: that diverging current-account (CA) balances enhanced the fragility of the member countries of the euroarea, but were not the cause of the liquidity crisis that occurred between 2010 and 2012; and that A&F’s quantity-theoretic view of monetary policy implementation is not applicable to a floating currency like the euro, or to the Target 2 payment system. To these objections, the authors reply that the policy prescription for targeting current-account balances is based on the proposition that relevant underlying factors such as losses of competitiveness, sticky real exchange rates, persistent trade deficits, sudden stops in capital flows, and vanishing liquidity can account for a liquidity crisis independent of fiscal irresponsibility; and that their original model simply shows that, in the aftermath of the financial crisis, the size of the balance sheets of major central banks has exploded. Considering the high correlation between the size of central banks’ balance sheets and the monetary base, the obvious question is: if the quantity of the monetary base is not a useful concept, why are we having an indigestion of quantitative easing?

Keywords: Eurozone, external imbalances, adjustment mechanism

JEL Classification: E42, E52, E58

Suggested Citation

Alessandrini, Pietro and Fratianni, Michele, In the Absence of Fiscal Union, the Eurozone Needs a More Flexible Monetary Policy: A Reply (September 12, 2016). PSL Quarterly Review, vol. 69 n. 278, 2016. Available at SSRN: https://ssrn.com/abstract=3100753

Pietro Alessandrini (Contact Author)

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Michele Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

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