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