The Euro Crisis: The Role of Different Economic Traditions · The Role of Different Economic...
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Brunnermeier – Financial Dominance The Euro Crisis: The Role of Different Economic Traditions Markus K. Brunnermeier EEA 2015 Mannheim, August 26 th , 2015
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Transcript of The Euro Crisis: The Role of Different Economic Traditions · The Role of Different Economic...
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The Euro Crisis:The Role of Different Economic TraditionsMarkus K. Brunnermeier
EEA 2015 Mannheim, August 26th, 2015
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“interests are interpret through the lens of ideas”≈models
• From forthcoming book“The Euro Crisis & the Battle of Economic Ideas”
Brunnermeier, James & Landau
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Watershed Moments/Turning Points
2010: Deauville PSI agreement – Contagion & Power shift
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Watershed Moments/Turning Points
2010: Deauville PSI agreement – Contagion & Power shift
2012: Mario Draghi’s “Whatever it takes” Speech in London
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Watershed Moments/Turning Points
2010: Deauville PSI agreement – Contagion & Power shift
2012: Mario Draghi’s “Whatever it takes” Speech in London
2013: Cyprus Bail-in
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity• No-bailout clause/rule fiscal union
3. Solvency Liquidity/contagion
4. Austerity/Reform Keynesian Stimulus
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“Rhine-divide”
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules vs. Discretion
• “ad hocery” flexible crisis management
• Federal structure central government
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules vs. Discretion
Time-inconsistency problem btw ex-ante ex-post efficiency
Price stability promise not to inflate in the future
Fiscal sustainability promise to spend in recessions (now)but consolidate
Financial stability promise only to provide liquiditybut not to bail-out (redistribute)insolvent institutions
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules vs. Discretion
Time-inconsistency problem btw ex-ante ex-post efficiency
Institutional Design (mechanism design)
• Fiscal dominance
• Monetary dominance
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Fiscal authority
Central Banksplit
Fiscal authority
Central Bank
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules vs. Discretion
Time-inconsistency problem btw ex-ante ex-post efficiency
Institutional Design (mechanism design)
• Fiscal dominance
• Monetary dominance
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Fiscal authority
Central Banksplit
Fiscal authority
Central Bank
Game of chicken
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules vs. Discretion
Time-inconsistency problem btw ex-ante ex-post efficiency
Institutional Design (mechanism design)
• Fiscal dominance
• Monetary dominance
• “Financial dominance”
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Fiscal authority
Central Banksplit
Fiscal authority
Central Bank
Game of chicken
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules vs. Discretion
Time-inconsistency problem btw ex-ante ex-post efficiency
Institutional Design (mechanism design)
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Fiscal authority
Central Banksplit
Fiscal authority
Central Bank
Game of chicken
FinancialSector
recap Redistributive MoPo (i, QE, ….)
2nd Game of chicken
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity• No-bailout clause/rule fiscal union
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity• No-bailout clause/rule fiscal union
• SDRM/insolvency procedure
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity• No-bailout clause/rule fiscal union
• SDRM/insolvency
• ESBies without joint liability Eurobonds with joint liability
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity
3. Solvency Liquidity/contagion• E[NPV]>0 - multiple equilibria
at what discount rate? “big bazooka”
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity
3. Solvency Liquidity/contagion• E[NPV]>0 - multiple equilibria
at what discount rate? “big bazooka”
- amplification/spirals
E[NPV bailout]>0
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity
3. Solvency Liquidity/contagion• E[NPV]>0 - multiple equilibria
at what discount rate? “big bazooka”
- amplification/spirals
E[NPV bailout]>0
E[PV bailout – PV no bailout]>0
contagion/systemic
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity
3. Solvency Liquidity/contagion• E[NPV]>0 - multiple equilibria
at what discount rate? “big bazooka”
- amplification/spirals
E[NPV bailout]>0
E[PV bailout – PV no bailout]>0
contagion/systemicBail-in Bail-out/LLR
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity
3. Solvency Liquidity/contagion• E[NPV]>0 - multiple equilibria
at what discount rate? “big bazooka”
- amplification/spirals
E[NPV bailout]>0
E[PV bailout – PV no bailout]>0
contagion/systemicBail-in Bail-out/LLR
• Countries
• Financial Sector22
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Dimensions of Differences in economic traditions
“German” “French”
1. Rules Discretion
2. Liability Solidarity
3. Solvency Liquidity/contagion
4. Austerity/Reform Keynesian Stimulus• Program=stimulus
• Merkel/Schäuble Hollande, Rajoy, Renzi, Tsipras, …
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“Rhine-divide”
