Covid-19

What price to pay for monetary financing of budget deficits in the euro area vox, cepr policy porta

What price to cover monetary financing of budget deficits in the euro area

There keeps growing acceptance that some type of monetary finance is necessary, if not inevitable, in light of the severe nature of the downturn in the euro area. This column argues that while a monetisation of the deficits induced by the COVID-19 crisis would eventually raise the price level in order that, after a go back to economic normalcy, inflation would rise for two years, this is a cost worth paying in order to avoid future sovereign debt crises in the euro area. Moreover, the ECB, as the utmost independent central bank on earth, will be well equipped to avoid the inflationary upsurge from becoming permanent.

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Government financing of r-d

Government financing of r-d

The simulations show that neither (maximising) additionality nor (minimising) redundancy can be an appropriate criterion for evaluation of R&D support policies. Projects with less additionality or more redundancy may generate greater welfare. We also show that both full grants and interest-free loans – which are typical of observed policies – perform much worse that the perfect policy, unless the price of public funds is quite low, or the externality is quite large. Shifting from full grants to interest-free loans generate a considerable welfare gain, unless public funds have become cheap.