The ECB and the Cost of Independence. Unearthing a New Doom-Loop in the European Monetary Union

Armando Marozzi

No 21152, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: Central Bank Independence has often been praised as a "free lunch" as it lowers inflation with no costs to output. This paper, instead, claims that in a peculiar monetary union such as the European Monetary Union (EMU) defending the independence during a financial crisis can be macroeconomically costly: unconventional monetary policies may expose the European Central Bank (ECB) to the threat of fiscal dominance which, in turn, might endogenously shift the ECB’s fiscal stance toward fiscal conservatism. Fiscally hawkish signals can then depress GDP and inflation, thereby forcing the ECB to prolong the unconventional stimuli to achieve its target. This paper finds evidence of this new "doom-loop" at the core of the EMU.

Keywords: ECB; monetary-fiscal interaction; CBI; unconventional monetary policy; EMU; fiscal communication (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 E63 (search for similar items in EconPapers)
Pages: 62
Date: 2021
New Economics Papers: this item is included in nep-eec, nep-his, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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