Thursday, May 3, 2012

Tyler Cowen - What are the alternatives to austerity for the Eurozone?

Just how much monetary policy needs to be done?  At this point, we’re not talking about a move from price stability to say four percent eurozone inflation (which I would nonetheless favor, and favored all the more a year or two ago), rather much more would be required.
Read it at Marginal Revolution
What are the alternatives to austerity for the Eurozone?
By Tyler Cowen

At the recent INET conference, I believe it was Paul Martin (former Prime Minister of Canada) who said that policy measures must be implemented the first time with enough backing to meet goals otherwise the ability to gain support for future rounds becomes increasingly difficult. Both in the US and Europe, central banks have already greatly expanded balance sheets in several rounds. My concern with attempting to promote high enough inflation through monetary policy is that both central bank balance sheets could require expansion to or above 100% of GDP. If a willingness to go that far is not credible (likely politically), then further attempts may actually increase risks with very little reward. This seems especially true in Europe, where if countries ultimately leave the Euro, the ECB may end up with sizable losses that are not backed by any central Treasury (but could fall largely on Germany).

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