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

PSL Quarterly Review, vol. 68 n. 275, 2015

18 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: December 12, 2015

Abstract

This paper makes three points. The first is that external imbalances between Member States are relevant for the performance of a monetary union when the latter is not backed by a strong political commitment and a solid political framework. Eurozone policymakers have ignored these inter-member imbalances and have instead concentrated on union-wide imbalances, so much so that statistical data on the former phenomenon still remain largely incomplete. There are signs that a correction is in the making, which we hope will lead to a comprehensive quantitative knowledge of intra-EMU imbalances. The second objective of the paper is to design specific policies aimed at reducing inter-member external disequilibria, for example by fixing targets on current-account imbalances symmetrically applied to both deficit and surplus countries. The contrast between the keen attention of the EZ policymakers on national fiscal imbalances and the belated and lukewarm attention given to external imbalances is striking. The third aim of the paper is to propose a more flexible monetary policy aimed at controlling the distribution of liquidity among Member States, resulting from inter-member external imbalances. Our 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.

Keywords: urozone, external imbalances, adjustment mechanism, sterilisation

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 (December 12, 2015). PSL Quarterly Review, vol. 68 n. 275, 2015. Available at SSRN: https://ssrn.com/abstract=3100800

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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