What is Wrong with the Euro Area Monetary Model?

  • Philip Arestis
  • Malcolm Sawyer


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.


Interest Rate Monetary Policy Central Bank Fiscal Policy Euro Area 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Angeloni, I., Kashyap, A., Mojon, B. and Terlizzese, D. (2002) ‘Monetary transmission in the euro area: where do we stand?’, European Central Bank Working Paper Series, 114.Google Scholar
  2. Arestis, P. and Sawyer, M. (2003) ‘Does the stock of money have any significance?’, Banca Nazionale Del Lavoro Quarterly Review, 56, 225, pp. 113–36.Google Scholar
  3. Arestis, P. and Sawyer, M. (2004) ‘Can monetary policy affect the real economy?’, European Review of Economics and Finance, 3(3), pp. 9–32.Google Scholar
  4. Bank of England (1999) Economic Models at the Bank of England (London: Bank of England).Google Scholar
  5. Church, K.B., Mitchel, P.R., Sault, J.E. and Wallis, K.F. (1997) ‘Comparative performance of models of the UK economy’, National Institute Economic Review, 161, pp. 91–100.CrossRefGoogle Scholar
  6. Forder, J. (2000) ‘The Theory of Credibility: Confusions, Limitations, and Dangers’, International Papers in Political Economy, 7(2), pp. 3–40.Google Scholar
  7. Graziani, A. (1989) ‘The theory of the monetary circuit’, Thames Papers in Political Economy, Spring, pp. 1–26.Google Scholar
  8. Graziani, A. (1994) La Teoria Monetaria della Produzione (Rome: Banca Popolare dell’Etruria e del Lazio).Google Scholar
  9. Graziani, A. (2003) The Monetary Theory of Production (Cambridge University Press).CrossRefGoogle Scholar
  10. Monetary Policy Committee (1999) The Transmission Mechanism of Monetary Policy (London: Bank of England).Google Scholar
  11. Peersman, G. and Smets, F. (2001) ‘The Monetary Transmission Mechanism in the Euro Area: More Evidence from VAR Analysis’, ECB Working Paper no. 91 (Frankfurt am Main: ECB).Google Scholar
  12. Rogoff, K. (1985) ‘The Optimal Degree of Commitment to an Intermediate Monetary Target’, Quarterly Journal of Economics, 100(4), pp. 1169–89.CrossRefGoogle Scholar
  13. Van Els, P., Locarno, A., Morgan, J. and Villetelle, J.-P. (2001) ‘Monetary policy transmission in the euro area: what do aggregate and national structural models tell us?’, European Central Bank Working Paper Series, 94.Google Scholar

Copyright information

© Philip Arestis and Malcolm Sawyer 2005

Authors and Affiliations

  • Philip Arestis
  • Malcolm Sawyer

There are no affiliations available

Personalised recommendations