CAMBRIDGE JOURNAL OF ECONOMICS (forthcoming)
“Solvency rule” and capital centralization in a monetary union
Emiliano Brancaccio (University of Sannio) and Giuseppe Fontana (Leeds University and University of Sannio)
Brancaccio and Fontana (2013) have suggested that the central bank influences the solvency conditions of firms and households in the economic system. This “solvency rule” is examined here within a stylised model of a monetary union characterised by different rates of accumulation and inflation across its two member countries. The rule highlights the existence of a relationship between the interest rate set by the central monetary authority, and the allocation of ownership of physical capital among the member countries of the monetary union, i.e. the “rates of capital centralization”. The paper also shows the conditions under which deflationary, currency devaluation and government intervention policies are able to guarantee the achievement and maintenance of the solvency condition.
Keywords: Taylor rule, Solvency rule, monetary union, capital centralization, deflation, currency devaluation.
JEL classifications: E5, F34, F36, G33, G34