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A national public bank to finance a euro zone government: Getting the funds for investment and recovery packages

Oliver Picek

No 1512, Working Papers from New School for Social Research, Department of Economics

Abstract: A national public bank may be used to finance the national fiscal policy of a country within the euro zone. The bank would only hold domestic government bonds. It would get its funds from the Eurosystem, pledging government bonds as collateral. The publicly owned bank would apply for funds like any other bank, legally not violating the prohibition of monetary financing provision in EU treaties. Effectively, as the profits of the bank are returned to the government, interest on newly issued bonds can be saved, freeing up additional resources for government spending and investment. The biggest risk to the bank is a margin call by the national central bank in response to a fall in the market price of government bonds. A rule change in the ECB collateral scheme is proposed to remedy this risk. Then, a public bank could insulate the national government from buyer strikes and allow the state to pursue an adequate fiscal policy to create employment while debt servicing costs remain subdued.

Keywords: Government Finance; Euro Crisis; Public Bank; Euro Area; European Central Bank; Financing Stimulus; Fiscal Policy; Public Debt Reduction; Monetary Financing; Government Bonds; Public Investment; Government Spending (search for similar items in EconPapers)
JEL-codes: E42 E52 E62 E63 H1 H12 H63 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-06
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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http://www.economicpolicyresearch.org/econ/2015/NSSR_WP_122015.pdf First version, 2015 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:1512

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