Working Paper: CEPR ID: DP616
Authors: Michael J. Moore; Thomas O'Connell
Abstract: As Stage Two of European Monetary Union (EMU) in Europe develops, a major issue is the coordination of monetary policies. Member countries of the European Monetary System (EMS) will have to align their domestic source moneys. This paper argues that for this purpose, the Treasury and central bank in each country needs to be consolidated. The implications of this are that external financing of budget deficits becomes part of domestic money creation. This concept is set in a steady-state version of the Girton-Roper framework for the monetary approach to the balance of payments. The theory is tested for a number of European countries using the Johansen procedure.
Keywords: Economic and Monetary Union; Domestic Credit Expansion; External Financing of Budget Deficits
JEL Codes: E52; E58; F33; F36; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external financing of budget deficits (H68) | domestic money creation (E51) |
| government foreign borrowing (H63) | exchange market pressure (F31) |
| government borrowing (H74) | exchange market pressure (F31) |
| domestic credit (E51) | exchange market pressure (F31) |
| domestic assets (D14) | exchange rates (F31) |
| foreign money (F31) | exchange rates (F31) |