A0251
Title: Who is afraid of eurobonds?
Authors: Anna Rogantini Picco - Sveriges Riksbank (Sweden) [presenting]
Leonardo Melosi - Federal Reserve Bank of Chicago (United States)
Francesco Bianchi - Johns Hopkins (United States)
Abstract: The low-interest rate environment and the growing asymmetry in the size of fiscal imbalances pose a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero lower bound (ZLB) constraint. We study a new framework that allows EA policymakers to separate the need for short-run macroeconomic stabilization from the issue of long-run fiscal sustainability. The central bank tolerates the increase in inflation needed to stabilize the amount of Eurobonds issued in response to large EA recessions. National governments remain responsible for backing their country-level debt with fiscal adjustments. The policy acts as an automatic stabilizer that benefits both high-debt and low-debt countries, generating a moderate increase in inflation that mitigates the recession and allows the central bank to move away from the ZLB.
