What is Wrong with the Euro Area Monetary Model?
The creation of the euro has also created a euro area of countries with a single currency and a single monetary policy, but with no other euro area level macroeconomic policies. The fiscal policies of the national governments are supposedly constrained by the Stability and Growth Pact (SGP), which places an upper limit of 3 per cent of GDP on government deficits and a balance or small surplus on the government budget over the course of the business cycle. In this chapter, we argue that the monetary policy of the euro area is firmly based on what has been termed the ‘new consensus’ in macroeconomics (NCM). This new consensus stands in contrast with the monetary theory of production (and Graziani’s many contributions, including Graziani, 1994, 2003), where ‘understanding of the workings of an economic system can only be acquired if the economy is analysed from the outset as a monetary economy’ (Graziani, 1989, p. 1). Three of the key features of the NCM-based euro-area monetary model involve the classical dichotomy, the neutrality of money and the relevance of Say’s Law: and clearly each of those features is rejected by the monetary theory of production.
KeywordsInterest Rate Monetary Policy Central Bank Fiscal Policy Euro Area
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