How to complete a monetary union
8 important questions on How to complete a monetary union
Why are there no liquidity crises in stand-alone countries? How is this applicable to a MU?
How does a liquidity crisis self-fulfill? How can the CB prevent this?
Banks need cash and sell assets by lowering price > solvency crisis possible. CB can act as LOLR, which gives confidence > rarely have to step in. Same for government bonds.
How are LOLR operations called by the ECB? Describe them.
In the program, the ECB buys government bonds that mature in 1-3 years. The aim is to prevent divergence in short-term bond yiels and that the ECBs MP is transmitted equally to all the Eurozone members.
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Why should national budgets and debt be consolidated into one central component? What does this require?
2. a mechanism of automatic transfers can be organized (insurance)
Requires far-reaching political union, Eurozone is unwilling to have that.
What step can the Eurozone take towards a political union?
2. banking union: allows the cost of resolving banking crisis to be spread out; implies some form of fiscal union, in times of crisis there must be an institution with sufficient resources to intervene (recapitalize banks)
Countries often are unwilling to hand over the national instruments of economic policies to European institutions. What measures strenghening control of budgetary policies and macroeconomic policies have been put into place?
2. stronger sanctioning procedure
3. European Semester (requires national governments to present annual budgets)
4. monitoring of macroeconomic variables aimed at detecting imbalances
How does political integration affect the optimality of a MU?
2. to issue some part of the national debts jointly (reduces scope for liquidity crisis individual countries)
3. have some form of coordination of those areas that can generate macroeconomic shocks
What is meant by an omitted deep variable?
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