Managing a Fragile Eurozone

Why does the Spanish government pay significantly more to borrow than the UK government – despite having a smaller deficit and lower overall debt? This column argues that the reason lies in the Eurozone’s fragility. Its members lose their ability to issue debt in a currency over which they have full control. The column discusses ways to deal with this weakness.  

A monetary union is more than just a single currency and a single central bank. Countries that join a monetary union lose more than one instrument of economic policy. They lose their capacity to issue debt in a currency over which they have full control.

The hard task of pricing liquidity risk

The credit crisis continues unabated. In order to understand the nature of the crisis, it is useful to think of it as a failure to price liquidity risk correctly; a failure that has an interesting dynamics. During the last five years prior to August 2007, the market systematically underestimated liquidity risk and therefore systematically put […]

Central banks are responsible for bubbles and crashes

Many central bankers have argued that they should not target (or try to influence) asset prices. The recent events show how shaky this argument is. The argument makes sense if the banking system is insulated from the asset markets. In that case a central bank can reasonably argue that asset bubbles and crashes are none […]