Roberto Bonfatti, Adam Brzezinski, K. Kıvanç Karaman, Nuno Palma, 27 September 2020

Monetary capacity refers to a state's capacity to circulate money that is accepted by the public, while fiscal capacity refers to its capacity to tax. This column argues that monetary and fiscal capacity and, by extension, markets and states have a symbiotic relationship. The long-run European evidence from antiquity to the modern period corroborates this mutual dependence, with money stocks and tax revenues moving in close synch. History also offers a natural experiment to estimate the causal effect of monetary capacity on fiscal capacity, with New World silver increasing money stocks and in turn tax revenues in a significant and substantial way.

Roel Beetsma, Brian Burgoon, Francesco Nicoli, Anniek de Ruijter, Frank Vandenbroucke, 21 August 2020

Building a large and durable consensus for mutual assistance policies in the EU is challenging. Even in times of crisis, member states express different preferences, and policies must reckon with democratic politics. This column presents evidence from a randomised survey to assess support for various EU budgetary assistance packages across five member states. A majority of packages are supported in all countries, although individual design features have significant effects on public approval. Importantly, it is possible to design packages such that they obtain majority support across all sampled countries, a key condition for success with policies of this kind.

Viral Acharya, Lea Borchert, Maximilian Jager, Sascha Steffen, 10 August 2020

During the 2008/09 global financial crisis, European governments bailed out a large number of banks that were severely affected by the crisis. This column documents how the design of the bailout policy was determined by the fiscal capacity of the respective country. Fiscally weak countries recapitalised banks insufficiently, causing undercapitalised banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker overall credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the ECB. Kicking the can down the road in 2008/09 thus sowed the seeds of the future banking crisis. These results have potential implications for the ongoing COVID-19 pandemic as, if the economic situation further deteriorates, banking sector stability is likely to be adversely affected.

Lorenzo Codogno, Paul van den Noord, 25 March 2020

The COVID-19 outbreak that is hitting the euro area economy needs to be met by a powerful policy response beyond the emergency measures already in place. This column uses an empirically calibrated model to show that the creation of a safe asset and fiscal capacity at the centre – on which the debate has been ongoing for a long while – would be a powerful means to mitigate the economic impact of the crisis.

Rafael Ch, Jacob Shapiro, Abbey Steele, Juan F. Vargas, 29 January 2019

It is widely accepted that war between states can lead to increased fiscal capacity. Yet, there is no similarly clear, historically consistent accounting of how civil wars have affected state capacity and tax revenues. Using recent evidence from Colombia, this column shows that municipalities affected by internal conflict have tax institutions consistent with the preferences of the parties that have managed to inflict more violence in the past. Internal armed conflict can help interest groups capture municipal institutions for their own private benefit, impeding state-building.

Marco Buti, Nicolas Carnot, 07 December 2018

The debate continues over the needed ingredients for a stable Economic and Monetary Union. Some authors have argued that the completion of a financial union (banking union and capital markets union) together with sound national fiscal policies eliminate the need for common budgetary instruments. The authors of this column beg to disagree and re-state the case for a central fiscal capacity. In essence, whilst financial union and a euro area fiscal stabilisation are substitutes in normal times, they are complementary in bad times. 

Lars Feld, 31 July 2018

In their CEPR Policy Insight, the team of French and German economists focus on a compromise between market discipline and risk sharing. This column, part of the VoxEU debate on euro area reform, argues that their proposal fails to address legacy debt problems convincingly and that the introduction of a fiscal capacity would repeat the mistakes made at the introduction of EMU, with later steps towards European integration being attempted before the necessary first steps have been taken.

K. Kıvanç Karaman, Sevket Pamuk, Seçil Yıldırım-Karaman, 24 February 2018

There is a notable lack of long-run analyses of monetary systems and their stability. This column addresses this gap by looking at the monetary systems of major European states between 1300 and 1914. The evidence collected suggests that, despite many switches between standards and systems, fiscal capacity and political regimes ultimately shaped patterns of monetary stability. Theories of monetary stability that rely on the mechanics of monetary systems perform poorly when such a long-run perspective is taken.

Joram Mayshar, Omer Moav, Zvika Neeman, Luigi Pascali, 11 September 2015

Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers.

Jean-Pierre Landau, 02 December 2014

Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.

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