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Monetary theory is NOT a failure !

Credit woes/Financial issues

Monetary Theory

- Financing debt with debt

- Issues with bonds

- Credit ratings

- Moral hazard

Debt/GDP ratio

2008 - 66.2% | 2012 - 90% | 2014 - 92.6% (estimated)

Set of ideas: how monetary policy should be conducted

European Sovereign Debt Crisis

- Collapse of financial institutions

- High gov debt

- Increasing bond yield spreads in gov securities

Example: Cyprus, Iceland, Greece ...

External factors

- Global demand drop (Decline in exports)

- Fragility of banking sector

- Volatility of the Euro

- Political conflict

- Slow and indecisive actions by European officials

Low growth, high debts?

HOW TO APPROACH?

- Diminish the ability to repay the debt

Real reasons?

7

Positive vs Normative

Institutional Conflicts

- Positive = objective & fact based

- Normative = subjective & value based

- Goal of Monetary Theory = purely positive !

- In making decisions

- European Central Bank is interdependent

- Between ECB's and nations' policy

Fiscal Imbalance

- Budget deficits

- Fiscal consolidation/Austerity

- Mass unemployment => Increase in welfare bill

Recognition Lag

Conclusion

- Timing and Decision

- Time gap between realization and actualization

- Affects policy decisions negatively

- Multitude of catalysts in the sovereign debt crisis of the Eurozone

Image by Tom Mooring

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