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The eurozone: what is to be done to maintain macro and financial stability?

Minford, Patrick ORCID: https://orcid.org/0000-0003-2499-935X, Ou, Zhirong ORCID: https://orcid.org/0000-0002-4610-7183, Wickens, Michael ORCID: https://orcid.org/0000-0002-6862-0674 and Zhu, Zheyi 2022. The eurozone: what is to be done to maintain macro and financial stability? Journal of Financial Stability 63 , 101064. 10.1016/j.jfs.2022.101064

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Abstract

The financial stability of the eurozone depends on its macroeconomic stability and vice versa. We construct a macro DSGE model of the eurozone and its two main regions, the North and the South, with the aim of matching the macro facts of these economies by indirect inference and using the resulting empirically-based model to assess possible new policy regimes that could maintain financial stability. The model we have found to fit the facts suggests that substantial gains in stability and consumer welfare are possible if the fiscal authority in each region is given the freedom to respond to its own economic situation. Further gains could come with the restoration of monetary independence to the two regions, in effect creating a second `southern euro' bloc. Enhanced fiscal flexibility increases fluctuations in debt and deficit ratios to GDP while keeping average ratios stable, maintaining solvency. A reformed Stability and Growth Pact could be limited to monitoring solvency.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
Publisher: Elsevier
ISSN: 1572-3089
Date of First Compliant Deposit: 20 December 2021
Date of Acceptance: 16 December 2021
Last Modified: 29 Nov 2022 10:23
URI: https://orca.cardiff.ac.uk/id/eprint/146207

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