FIRE for the Euro: A Superior Way to Bond Market Stabilization

Heinemann, Friedrich

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Document Type: Article
Year of publication: 2012
The title of a journal, publication series: Jahrbücher für Nationalökonomie und Statistik = Journal of Economics and Statistics
Volume: 232
Issue number: 6
Page range: 702-709
Place of publication: Berlin
Publishing house: De Gruyter Oldenbourg
ISSN: 0021-4027 , 2366-049X
Publication language: English
Institution: Außerfakultäre Einrichtungen > SFB 884
Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
Subject: 330 Economics
Abstract: Government bond markets within the euro zone may have fallen victim to a self-fulfilling crisis of confidence. Eurobonds may contribute to stabilization in the short-run but would imply destructive disincentives and incalculable risks for joint and several guarantors. Monetary interest rate equalization through the ECB government bond purchase program poses risks for central bank credibility and price stability. This contribution proposes fiscal interest rate equalization (FIRE) as an alternative. With FIRE, countries that benefit from low interest rates as a consequence of market panics would transfers some of their savings to subsidize the borrowing of crisis countries within a conditional fiscal scheme. The paper presents FIRE’s principles and discusses its advantages over alternative stabilization approaches. Furthermore, a simulation of a FIRE specification is presented which would shield Italy and Spain against interest rates above 5 percent.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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