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EJCE Year: 2018, June. Volume: 15 - Issue: 1

Fiscal austerity and monetary easing: which one is to be praised for ending the euro area crisis?

by Pompeo Della Posta

Start page: 165 - End page: 189

Keywords: Fiscal policy, monetary policy, lender of last resort, euro Area crisis, ECB

Jel code: E65; F34; F36

DOI: 10.25428/1824-2979/201801-165-189

Abstract:

In this paper I have used a framework for the analysis of public debt stability that dates back to Domar, and I have extended it in order to consider, together with the role played by the interest rate, the rate of GDP growth and domestic fiscal policy, also monetary solidarity. A special role has been reserved in the analysis to the effects of agents’ heterogeneous expectations and uncertainty. I have also considered the effects of fiscal austerity and monetary solidarity on GDP growth and interest rates, and I have concluded that the euro area crisis came to an end thanks to the latter (the former having made things even worse, if anything). Within the same framework, I have been able to discuss also some of the other proposals, including federal solidarity, that have been advanced in the literature in order to avoid or to address future euro area crises.

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