nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒05‒11
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Fed’s “Ample-Reserves” Approach to Implementing Monetary Policy By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  2. Monetary and Fiscal Policy Interactions in a Frictional Model of Money, Nominal Public Debt and Banking By Saroj Dhital; Pedro Gomis-Porqueras; Joseph H. Haslag
  3. Monetary Policy Implementation with an Ample Supply of Reserves By Kyungmin Kim; Antoine Martin; Gara Minguez-Afonso; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
  4. Central Bank Digital Currency - Objectives, preconditions and design choices By Peter Wierts; Harro Boven
  5. Unconventional monetary policy shocks in the euro area and the sovereign-bank nexus By Hristov, Nikolay; Hülsewig, Oliver; Scharler, Johann
  6. Common and Idiosyncratic Inflation By Matteo Luciani
  7. Fiscal Flow Volatility and Reserves By Jeff W. Huther; Luke Pettit; Mark Wilkinson
  8. Assessment of the change in the trajectory of adaptation of the real ruble exchange rate to the equilibrium due to a change in the monetary policy regime By Fokin, Nikita (Фокин, Никита)
  9. Monetary Policy Uncertainty and Monetary Policy Surprises By Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu
  10. The Linkages between Inflation and Inflation Uncertainty in Selected Asian Economies: Evidence from Quantile Regression By Jiranyakul, Komain
  11. Would a State Monopoly Over Money Creation Allow for a Reduction of National Debt? A Study of the “Seigniorage Argument” in Light of the “100% Money” Debates By Samuel Demeulemeester
  12. Innocent Bystanders? Monetary Policy and Inequality in the U.S. By Olivier Coibion; Yuriy Gorodnichenko; Lorenz Kueng; John Silvia
  13. Collateral eligibility of corporate debt in the Eurosystem By Pelizzon, Loriana; Riedel, Max; Simon, Zorka; Subrahmanyam, Marti G.
  14. Forecasting the US Dollar-Korean Won Exchange Rate: A Factor-Augmented Model Approach By Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
  15. The Economics of Helicopter Money By Pierpaolo Benigno; Salvatore Nisticò
  16. Cryptocurrency Market Reactions to Regulatory News By Raphael A. Auer; Stijn Claessens
  17. Original Sin and the Great Depression By Michael D. Bordo; Christopher M. Meissner
  18. Optimal policy perturbations By Régis Barnichon; Geert Mesters
  19. What Happened in Money Markets in September 2019? By Sriya Anbil; Alyssa G. Anderson; Zeynep Senyuz
  20. On Public Spending and Unions By Fernando Broner; Alberto Martin; Jaume Ventura
  21. Loan Types and the Bank Lending Channel By Victoria Ivashina; Luc Laeven; Enrique Moral-Benito
  22. Currency appreciation, distance to border and price changes: Evidence from Swiss retail prices By Foellmi, Reto; Jaeggi, Adrian; Schnell, Fabian
  23. Effects of macroprudential policies on bank lending and credit risks By Stefanie Behncke
  24. The Riddle of the Natural Rate of Interest By Weshah Razzak
  25. Overcoming the gridlock in EMU decision-making By Micossi, Stefano; Peirce, Fabrizia

  1. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: We describe the Federal Reserve’s (the Fed’s) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed’s experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of monetary policy, and conclude with an overview of the benefits of an ample-reserves regime. This primer is intended to enhance discussions and understanding of the Fed’s actions and communications regarding monetary policy implementation, as many resources on this topic may be out of date given the recent evolution of the policy environment.
    Keywords: Monetary policy implementation; Reserve balances; Ample-reserves regime; Administered rates; Interest on reserves; Open market operations
    JEL: E58 E52 E43
    Date: 2020–02–27
  2. By: Saroj Dhital (Economics and Business Department, Southwestern University); Pedro Gomis-Porqueras (Department of Economics, Deakin University, Geelong, Australia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: In this paper we examine the interactions between fiscal and monetary policy in an economy with financial frictions, where fiat money, bank deposits and short and long-term nominal bonds coex-ist. Because agents face information frictions and bankers have limited commitment, fiat money is always accepted and bank deposits can be used in some trades. Within this frictional environment, we study how consumption inequality varies when the central bank pursues an active monetary pol-icy and when the fiscal authority is active. Specifically, we find that consumption wedges across the different states of the world are more severe when an active central bank pursues expansionary monetary policy. Moreover, we find a unique stationary equilibrium when the monetary authority follows an active policy, while multiple stationary equilibria exist when the fiscal authority pursues an active regime. Consequently, such indeterminacy can result in greater volatility in economies in which the fiscal authority is active and the central bank is passive.
    Keywords: taxes; inflation; liquidity premium
    JEL: E40 E61 E62 H21
    Date: 2020–04
  3. By: Kyungmin Kim; Antoine Martin; Gara Minguez-Afonso; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
    Abstract: Methods of monetary policy implementation continue to change. The level of reserve supply---scarce, abundant, or somewhere in between---has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-09 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called "ample" reserves. The Federal Reserve's announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.
    Keywords: Federal funds market; Monetary policy implementation; Ample reserve supply
    JEL: E42 E58
    Date: 2020–02–25
  4. By: Peter Wierts; Harro Boven
    Abstract: In principle, DNB has a favourable attitude to central bank digital currency (CBDC) which is money issued by a central bank and generally accessible to households and businesses. We believe the continued use of a public form of money is important. After all, the fungibility between private money and public money bolsters confidence in money when it is needed most - in periods of uncertainty including war, financial crisis or disruption of private payments. It is at those times that the demand for public money increases. Cash has fulfilled this role, but given the decrease in the use of cash this may be set to change in the future. The trend of declining use of cash has long been ongoing and appears to be of a structural nature. CBDC could provide the desired policy options to protect the balance between public and private forms of money and safeguard the fungibility between private and public money.The aim of this report is to contribute to the public debate on CBDC. The introduction of CBDC would involve a structural reform affecting users and the financial system as well as DNB's tasks and objectives. The social impact of such a reform requires broad public debate both in the Netherlands and the euro area as a whole. This study therefore serves as DNB's input for the debate on CBDC within the euro area. The euro was introduced in the Netherlands in 1999, involving a transfer of monetary policy autonomy to the European System of Central Banks (ESCB). That holds for CBDC as well. As a consequence, this study also looks at the European institutional and legal framework for CBDC.
  5. By: Hristov, Nikolay; Hülsewig, Oliver; Scharler, Johann
    Abstract: We explore the effects of the ECB's unconventional monetary policy on the banks' sovereign debt portfolios. In particular, using panel vector autoregressive (VAR) models we analyze whether banks increased their domestic government bond holdings in response to non-standard monetary policy shocks, thereby possibly promoting the sovereign-bank nexus, i.e. the exposure of banks to the debt issued by the national government. Our results suggest that euro area crisis countries' banks enlarged their exposure to domestic sovereign debt after innovations related to unconventional monetary policy. Moreover, the restructuring of sovereign debt portfolios was characterized by a home bias.
    Keywords: European Central Bank,unconventional monetary policy,panel vector autoregressive model,sovereign-bank nexus
    JEL: C32 E30 E52 E58 G21 H63
    Date: 2020
  6. By: Matteo Luciani
    Abstract: We use a dynamic factor model to disentangle changes in prices due to economy-wide (common) shocks, from changes in prices due to idiosyncratic shocks. Using 146 disaggregated individual price series from the U.S. PCE price index, we find that most of the fluctuations in core PCE prices observed since 2010 have been idiosyncratic in nature. Moreover, we find that common core inflation responds to economic slack, while the idiosyncratic component does not. That said, even after filtering out idiosyncratic factors, the estimated Phillips curve is extremely flat post-1995. Therefore, our results suggest that the flattening of the Phillips curve is the result of macroeconomic forces.
    Keywords: Core inflation; Dynamic factor model; Disaggregated consumer prices; Monetary policy
    JEL: C32 C43 C55 E31 E37
    Date: 2020–03–05
  7. By: Jeff W. Huther; Luke Pettit; Mark Wilkinson
    Abstract: In this note, we explain what changed in terms of fiscal flows into and out of the U.S. Treasury’s account and describe implications for monetary policy.
    Date: 2019–12–16
  8. By: Fokin, Nikita (Фокин, Никита) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: In this paper, a Bayesian error correction model is proposed based on which the change in the trajectory of adaptation of the real ruble exchange rate to equilibrium in response to oil shock after changing the monetary policy regime is estimated. At the end of 2014, the Bank of Russia switched to the inflation targeting regime released the ruble into free float. Against the backdrop of rapidly falling oil prices, the nominal exchange rate devalued by about 2 times. In 2017, the Ministry of Finance introduced a budget rule, according to which, with oil prices above $ 40 dollars in 2017 prices, the currency is purchased for the excess profits, thereby affecting the nominal ruble exchange rate. Given that since 2017, oil prices have not fallen below the threshold level, the budget rule permanently affected the ruble exchange rate. Thus, the current monetary policy regime is not a free exchange rate regime, but a quasi-free or quasi-fixed rate regime. In this paper, the task is to assess how the current regime of the monetary policy affected the reaction of the real ruble exchange rate to the shock of oil prices over the past 5 years.
    Keywords: real ruble exchange rate, monetary policy, Bayesian methods
    Date: 2020–03
  9. By: Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu
    Abstract: Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-term nominal and real yields. For a given monetary policy shock, the reaction of yields is more pronounced when the level of monetary policy uncertainty is low. Primary dealers and other investors adjust their interest rate positions more when monetary policy uncertainty is low than when uncertainty is high. These portfolio adjustments likely explain the larger pass-through of a monetary policy shock to bond yields when uncertainty is low. These findings shed new light on the role that monetary policy uncertainty plays in the transmission of monetary policy to financial markets.
    Keywords: Monetary policy surprises; Monetary policy uncertainty; Interest rates; Primary dealers
    JEL: E40 E50 G10
    Date: 2020–04–17
  10. By: Jiranyakul, Komain
    Abstract: Using monthly data from 1979M1 to 2019M12, this paper employs the AR(p)-EGARCH model and quantile regression to examine the linkages between inflation and inflation uncertainty in nine Asian countries. The results show that inflation positively causes inflation uncertainty in all economies regardless whether economies are inflation or non-inflation targeting. The Friedman-Ball hypothesis is thus supported. In addition, inflation uncertainty positively causes inflation in most economies. Therefore, the Cukierman-Meltzer likely to be supported. The findings signal the possibility of the real cost of inflation for these economies.
    Keywords: Inflation, inflation uncertainty, GARCH, quantile regression, Asian economies
    JEL: C22 E31
    Date: 2020–04
  11. By: Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet [Saint-Étienne] - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This chapter discusses the "seigniorage argument" in favor of public money issuance, according to which public finances could be improved if the state more fully exercised the privilege of money creation, which is, today, largely shared with private banks. (...)
    Keywords: 100% Money,Money Creation,Public Debt,Seigniorage,Chicago Plan,Irving Fisher
    Date: 2020–02–19
  12. By: Olivier Coibion (University of Texas at Austin); Yuriy Gorodnichenko (University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics); Lorenz Kueng (University of Lugano - Faculty of Economics; Swiss Finance Institute; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Northwestern University - Kellogg School of Management); John Silvia (Wells Fargo)
    Abstract: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
    Keywords: Monetary policy, income inequality, consumption inequality
    JEL: E3 E4 E5
    Date: 2020–04
  13. By: Pelizzon, Loriana; Riedel, Max; Simon, Zorka; Subrahmanyam, Marti G.
    Abstract: We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is una↵ected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
    Keywords: Collateral Policy,ECB,Corporate Bonds,Corporate Debt Structure,Eligibility premium
    JEL: G12 G14 G32 E58
    Date: 2020
  14. By: Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
    Abstract: We propose factor-augmented out of sample forecasting models for the real exchange rate between Korea and the US. We estimate latent common factors by applying an array of data dimensionality reduction methods to a large panel of monthly frequency time series data. We augment benchmark forecasting models with common factor estimates to formulate out-of-sample forecasts of the real exchange rate. Major findings are as follows. First, our factor models outperform conventional forecasting models when combined with factors from the US macroeconomic predictors. Korean factor models perform overall poorly. Second, our factor models perform well at longer horizons when American real activity factors are employed, whereas American nominal/financial market factors help improve short-run prediction accuracy. Third, models with global PLS factors from UIP fundamentals overall perform well, while PPP and RIRP factors play a limited role in forecasting.
    Keywords: Won/Dollar Real Exchange Rate; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast
    JEL: C38 C53 C55 F31 G17
    Date: 2020–05
  15. By: Pierpaolo Benigno (University of Bern and EIEF); Salvatore Nisticò
    Abstract: An economy plagued by a slump and in a liquidity trap has some options to exit the crisis. We discuss “helicopter money†and other equivalent policies that can reflate the economy and boost consumption. In the framework analysed – where lump-sum transfers may be the only e↵ective fiscal response, like in the current pandemic crisis – the central bank, and only the central bank, is the rescuer of last resort of the economy. Fiscal policy is bounded by solvency constraints unless the central bank backs treasury’s debt.
    Keywords: Helicopter money, ZLB, Pandemic Crisis
    JEL: E50
    Date: 2020–04
  16. By: Raphael A. Auer; Stijn Claessens
    Abstract: Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions.
    Keywords: digital currencies, cryptocurrencies, bitcoin, ethereum, distributed ledger technology, regulation, financial markets, event studies
    JEL: E42 E51 F31 G12 G28 G32 G38
    Date: 2020
  17. By: Michael D. Bordo; Christopher M. Meissner
    Abstract: Was foreign currency denominated debt a determinant of exchange rate and monetary policy during the Great Depression? Policy makers of the day thought so. High-frequency bond price data show depreciation was associated with elevated risk premia on public debt. We also show that foreign currency debt was a determinant of exchange rate policy during the Great Depression. The gold standard heightened exposure to global shocks and prolonged the Great Depression. Why then did countries hesitate to jettison the monetary technology? Multiple factors have been identified in the literature ranging from economic and political considerations to social preferences for monetary stability. We find that foreign currency debt and trade patterns, both shaped by history and geography, had a significant impact on these choices and hence on economic stability. The effect is likely to be about half as large as the output gap in determining exchange rate policy.
    JEL: F31 F34 N10 N2
    Date: 2020–04
  18. By: Régis Barnichon; Geert Mesters
    Abstract: Model mis-specification remains a major concern in macroeconomics, and policy makers must often resort to heuristics to decide on policy actions; combining insights from multiple models and relying on judgment calls. Identifying the most appropriate, or optimal, policy in this manner can be challenging however. In this work, we propose a statistic -the Optimal Policy Perturbation (OPP)- to detect "optimization failures" in the policy decision process. The OPP does not rely on any specific underlying economic model, and its computation only requires (i) forecasts for the policy objectives conditional on the policy choice, and (ii) the impulse responses of the policy objectives to shocks to the policy instruments. We illustrate the OPP in the context of US monetary policy decisions. In forty years, we only detect one period with major optimization failures; during 2010-2012 when unconventional policy tools should have been used more intensively.
    Keywords: macroeconomic stabilization, optimal policy, impulse responses, sufficient statistics, forecast targeting
    JEL: C14 C32 E32 E52
    Date: 2020–04
  19. By: Sriya Anbil; Alyssa G. Anderson; Zeynep Senyuz
    Abstract: In mid-September 2019, overnight money market rates spiked and exhibited significant volatility, amid a large drop in reserves due to the corporate tax date and increases in net Treasury issuance.
    Date: 2020–02–27
  20. By: Fernando Broner; Alberto Martin; Jaume Ventura
    Abstract: We analyze the conduct of fiscal policy in a financially integrated union in the presence of financial frictions. Frictions create a wedge between the return to investment and the union interest rate. This leads to an over-spending externality. While the social cost of spending is the return to investment, governments care mostly about the (depressed) interest rate they face. In other words, the crowding out effects of public spending are partly "exported" to the rest of the union. We argue that it may be hard for the union to deal with this externality through the design of fiscal rules, which are bound to be shaped by the preferences of the median country and not by efficiency considerations. We also analyze how this overspending externality - and the unions ability to deal with it effectively changes when the union is financially integrated with the rest of the world. Finally, we extend our model by introducing a zero lower bound on interest rates and show that, it financial frictions are severe enough, the union is pushed into a liquidity trap and the direction of the spending externality is reversed. At such times, fiscal rules that are appropriate during normal times might backre.
    Keywords: public spending, crowding out, financial frictions, fiscal union, spending externalities, fiscal coordination
    JEL: E62 F32 F34 F36 F41 F42 F45
    Date: 2020–02
  21. By: Victoria Ivashina; Luc Laeven; Enrique Moral-Benito
    Abstract: Using credit-registry data for Spain and Peru, we document that four main types of commercial credit—asset-based loans, cash-flow loans, trade finance and leasing—are easily identifiable and represent the bulk of corporate credit. We show that credit dynamics and bank lending channels vary across these loan types. Moreover, aggregate credit supply shocks previously identified in the literature appear to be driven by individual loan types. The effects of monetary policy and the effects of the financial crisis propagating through banks’ balance sheets are primarily driven by cash-flow loans, whereas asset-based credit is mostly insensitive to these types of effects.
    JEL: E0 G21
    Date: 2020–04
  22. By: Foellmi, Reto; Jaeggi, Adrian; Schnell, Fabian
    Abstract: How does the exchange rate affect the way that firms adjust their prices? We use quarterly firm and product price data, underlying the Swiss sectoral consumer price index. The data allows us to trace the pricing decisions of the identified firm over time and as a function of the distance to the border distance. The appreciation of the Swiss franc results in an increase in the probability of both positive and negative price changes. When a firm is more closely located to the border, the probability of a negative price change is higher. On the intensive margin, we document that an appreciation of the Swiss Franc leads to price reductions, and that this effect is stronger the closer a firm is located to the nearest border. However, for firms located far away from the border, an appreciation of the Swiss Franc leads to no price reductions or even increases. We rationalise this by the relative strengths of income and substitution effects. The substitution effect dominates for firms close to the border, while the income effect dominates for firms located further away from the border.
    Keywords: Price setting behavior of firms, exchange rate, distance to border
    JEL: E30 E31
    Date: 2020–04
  23. By: Stefanie Behncke
    Abstract: I analyse the effects of two macroprudential policy measures implemented in Switzerland: the activation of the countercyclical capital buffer (CCyB) and a cap on the loan-to-value (LTV) ratios. I use a difference-in-differences method to estimate the effects of these measures on risk indicators, such as their LTV and loan-to-income (LTI) ratios and mortgage growth rates. I find that both the CCyB and the LTV cap led to a reduction in high LTV mortgages. The banks affected by the CCyB also reduced their mortgage growth rates. I do not find any evidence that these measures had unintended consequences on LTI risks or on non-mortgage credit growth.
    Keywords: Banks, countercyclical capital buffer, financial stability, loan-to-value ratio, macroprudential policy, mortgages
    JEL: E5 G21 G28
    Date: 2020
  24. By: Weshah Razzak (School of Economics and Finance, Massey University, Palmerston North)
    Abstract: We provide a general equilibrium model with optimizing agents to compute the natural rate of interest for the G7 countries over the period 2000 to 2017. The model is solved for the equilibrium natural rate of interest, which is determined by a parsimonious equation that is easily computed from raw observable data. The model predicts that the natural rate depends positively on the consumption – leisure growth rates gap, and negatively on the capital – labor growth rates gap. Given our computed natural rate, the short-term nominal interest rates in the G7 have been higher than the natural rate since 2000, except for Germany and the U.S. during the period 2009-2017. In addition, the data do not support the prediction of the Wicksellian theory that prices tend to increase when the short-term nominal rate is lower than the natural rate. Projections of the natural rate over the period 2018 to 2024 are positive in Germany, Italy, Japan, and the U.K. and negative in Canada, France, and the U.S. The model predicts that fiscal expansion is an expensive policy to achieve a 2 percent inflation target when the Zero Lower Bound (ZLB) constraint is binding.
    Keywords: natural rate of interest, monetary policy
    JEL: C68 E43 E52
    Date: 2020
  25. By: Micossi, Stefano; Peirce, Fabrizia
    Abstract: The completion of EMU, and banking union as its critical component, requires that certain taboos in the policy debate are brought out in the open. First, the Commission must stop pretending that Italian public debt is sustainable under current policies and shift from politically motivated forbearance to serious implementation of the SGP and notably its debt rule. Second, it is necessary to acknowledge that crisis management by the ESM is crippled as long as its financial assistance can only be granted after the country in need is close to losing market access and, in addition, this threatens the financial stability of the entire euro area. The already-existing alternative to assist a country that is not respecting the SGP is to utilise the enhanced conditional credit line (ECCL) introduced by the ESM reform, approved by the European Council and awaiting national ratifications, in order to agree on a full-fledged adjustment programme before any euro area member (Italy) comes to the brink again – without any preventive conditions on the sustainability of public debt. And, third, the completion of the banking union requires a reduction of banks’ home sovereign portfolios, that can be incentivised by the introduction of mild concentration charges. However, the system will not work without simultaneously offering the banks and financial investors in general a true European safe asset, fully guaranteed by its member states. Our proposal is that such a safe asset could be offered by the ESM, which would purchase in exchange the sovereigns held by the ESCB as a result of the quantitative easing asset purchase programme. The risk of losses on these sovereigns would continue to lie with the national central banks, thus avoiding the transfer of new risks to the ESM. This Policy Insight is being published simultaneously as a LUISS SEP Policy Brief.
    Date: 2020–04

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