Summary: Macroeconomic Institutions and Policies M1
Module 1 – Lecture 1
Before slides
The eurozone, important topic
• Euro was created in January 1999
• In 2002 cash euros were created
• In 2008 big international banking crisis (Lehman Brothers US)
o Governments bailed out their banks
o Increased government debt
o Some countries needed support from EU countries
Quantitative easing
• Buying government bonds increases liquidity, decreases interest
• Countering deflation threat
o decreasing interest stimulates spending, and raises prices
• Stimulates spending
• Started in 2015, countering deflation threat.
Deflation
• Delayed expenditures, little economic activity
Inflation
• Around 2020
• Corona: disruption of supply chain, higher prices
• Expected rise of inflation → Higher interest rates
o Because, people want to be compensated for inflation if they save money
• Russian gas supply influences prices
Klaas knot interview
• Wants to build down QE
• Investors foresee a rise of interest
• Investors sold government debt → interest rate rises
ECB increases inflation rate
• Italy and Greece interest rate raised
• Their government Debt ratio (compared to GDP) is already very high
• More instability in the Eurozone → New crisis?
Introduction
Costs of joining a monetary union
• Policy instrument is lost → costly in case of asymmetry
Slides
Asymmetry: Aggregated demand goes up in Germany and down in France
• Solution France: interest rate down
• Solution Germany: interest rate up
• However: Monetary Union → not possible
• Y is fixed on the short term
EBE year 2, SM2 Rick Titulaer, 1-2-2022
, Wage flexibility
• In France, supply goes up
due to low wages
o Same Y, lower P
• In Germany, price goes up
due to high wages
o Same Y, higher P
• Wage flexibility is essential
to counter inequality of
supply and demand, given
the short term fixed Y.
Labour mobility
• Would fix the problem (wage flexible), cheap workers from other countries
• But not always can a change in wage influence supply
o Then, the inequality cannot be fixed
• The costs of the monetary union depend on how flexible the wages and prices are, as well
as the mobility of labour.
➔ France and Germany might regret being in a Monetary Union
Being in a monetary union
• Stability
o unexpected losses due to exchange rate changes are prevented.
• Less transaction costs with union members
o Stimulates trade
• Losing Monetary independence
o Cannot use monetary policy and change interest rates
o Harder to deal with asymmetric shocks
• Government debt is in a currency that they cannot control
o The interest rate is given by the union
o Countries with high debt (chance of default) will get their bonds sold
[see: illustrations]
Illustration: UK
o UK fears default → investors sell UK bonds → Pounds get traded to other currencies →
exchange rates go down → the UK central bank will buy the government bonds.
The CB can create liquidity. Investors know this, so there is no instability.
Illustration: Spain
o Spain fears default → investors sell Spanish bonds → the Spain central bank cannot buy
the government bonds. → price of bonds goes down → liquidity crisis → Spain's Debt is
growing at higher interest rate. → Default
Investors can speculate on this, which makes Spain instable.
EBE year 2, SM2 Rick Titulaer, 1-2-2022
Module 1 – Lecture 1
Before slides
The eurozone, important topic
• Euro was created in January 1999
• In 2002 cash euros were created
• In 2008 big international banking crisis (Lehman Brothers US)
o Governments bailed out their banks
o Increased government debt
o Some countries needed support from EU countries
Quantitative easing
• Buying government bonds increases liquidity, decreases interest
• Countering deflation threat
o decreasing interest stimulates spending, and raises prices
• Stimulates spending
• Started in 2015, countering deflation threat.
Deflation
• Delayed expenditures, little economic activity
Inflation
• Around 2020
• Corona: disruption of supply chain, higher prices
• Expected rise of inflation → Higher interest rates
o Because, people want to be compensated for inflation if they save money
• Russian gas supply influences prices
Klaas knot interview
• Wants to build down QE
• Investors foresee a rise of interest
• Investors sold government debt → interest rate rises
ECB increases inflation rate
• Italy and Greece interest rate raised
• Their government Debt ratio (compared to GDP) is already very high
• More instability in the Eurozone → New crisis?
Introduction
Costs of joining a monetary union
• Policy instrument is lost → costly in case of asymmetry
Slides
Asymmetry: Aggregated demand goes up in Germany and down in France
• Solution France: interest rate down
• Solution Germany: interest rate up
• However: Monetary Union → not possible
• Y is fixed on the short term
EBE year 2, SM2 Rick Titulaer, 1-2-2022
, Wage flexibility
• In France, supply goes up
due to low wages
o Same Y, lower P
• In Germany, price goes up
due to high wages
o Same Y, higher P
• Wage flexibility is essential
to counter inequality of
supply and demand, given
the short term fixed Y.
Labour mobility
• Would fix the problem (wage flexible), cheap workers from other countries
• But not always can a change in wage influence supply
o Then, the inequality cannot be fixed
• The costs of the monetary union depend on how flexible the wages and prices are, as well
as the mobility of labour.
➔ France and Germany might regret being in a Monetary Union
Being in a monetary union
• Stability
o unexpected losses due to exchange rate changes are prevented.
• Less transaction costs with union members
o Stimulates trade
• Losing Monetary independence
o Cannot use monetary policy and change interest rates
o Harder to deal with asymmetric shocks
• Government debt is in a currency that they cannot control
o The interest rate is given by the union
o Countries with high debt (chance of default) will get their bonds sold
[see: illustrations]
Illustration: UK
o UK fears default → investors sell UK bonds → Pounds get traded to other currencies →
exchange rates go down → the UK central bank will buy the government bonds.
The CB can create liquidity. Investors know this, so there is no instability.
Illustration: Spain
o Spain fears default → investors sell Spanish bonds → the Spain central bank cannot buy
the government bonds. → price of bonds goes down → liquidity crisis → Spain's Debt is
growing at higher interest rate. → Default
Investors can speculate on this, which makes Spain instable.
EBE year 2, SM2 Rick Titulaer, 1-2-2022
