Purchase of government bonds by a supranational central bank: its impact on business cycles

Masato Nakao () and Toichiro Asada ()
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Masato Nakao: Chiba University of Commerce
Toichiro Asada: Chuo University

Evolutionary and Institutional Economics Review, 2022, vol. 19, issue 1, No 17, 395-424

Abstract: Abstract The euro area emerged from the euro crisis without meeting the conditions presented by the theory of optimum currency area. The decisive policy that ended this crisis was the Outright Monetary Transactions policy. Besides, the quantitative easing policy supports the economy of the euro area after this crisis. To examine the impact of these supranational monetary policies on the business cycles in the euro area, which is not covered by optimum currency area theory, we use a Kaldorian two-country model featuring a monetary union and imperfect capital mobility. We find that an increase in government bond purchases is a stabilizing factor, whereas an extreme increase in the degree of counter-cyclical fiscal policy is a destabilizing factor. Nevertheless, as long as the fiscal and monetary policies of two countries are not extremely active, but active to a certain extent, the equilibrium point becomes locally stable. Furthermore, even if the business cycles are not synchronized, the purchase of government bonds of a particular country is effective in stabilizing the business cycles of both countries. From these results, we suggest that the euro area satisfies the metacriteria of an optimum currency area through the implementation of a government bond purchase system by a supranational central bank system.

Keywords: Optimum currency area; Business cycle stability; Kaldorian two-country model; Euro area; Outright monetary transactions; Quantitative easing (search for similar items in EconPapers)
JEL-codes: E12 F15 F41 F42 F44 F45 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40844-021-00207-3

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