Monetary Policy and Capital Centralisation in the EMU

Nouriel Roubini’s Economonitor – April 4, 2016

by Emiliano Brancaccio and Thomas Fazi

The sole use of the interest rate and any other conventional or unconventional monetary policy tool could prove inadequate for the management of aggregate expenditure and the attainment of the target variables incorporated into the same rules. A forthcoming paper in the Journal of Post-Keynesian Economics finds new and compelling evidence in support of this inadequacy (Brancaccio, Fontana, Lopreite, Realfonzo 2015). […]

The empirical analysis appear to be in line with those alternative lines of research that give the central bank a much more complex role, which is the management of financial stability and solvency of economic units by fixing interest rates on the basis of the dynamics of GDP and related incomes. […] A recent example of this alternative view is the so-called ‘solvency rule’ discussed in the Cambridge Journal of Economics (Brancaccio and Fontana 2013). […]

In light of this ‘solvency rule’, it has also been shown that, in the context of a monetary union, the interest rate set by the central monetary authority can influence the allocation of ownership of existing physical capital among the member countries of the monetary union. In this sense, monetary authorities perform the crucial role of ‘regulators of a social conflict’ between solvent firms capable of accumulating profits higher than interest rate payments due on their debts and firms that make losses and tend to become insolvent. […] (Brancaccio and Fontana 2015) […]

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