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 Research Projects at the MPIfG

Central Bank Liquidity Provision, Collateral Management and Fiscal Sovereignty

Marina Hübner


 
Fiscal sovereignty, or the power to tax and issue debt, is crucial to the output legitimacy of modern democracies. Besides international tax competition, financial globalization is considered to act as a powerful constraint on the national fiscal policy space. Stressing the role of bond vigilantes and sovereign credit ratings, the literature centers attention on the disciplinary effects of markets on states which seek to refinance themselves on credit markets. This markets-versus-states perspective, however, cannot capture the autonomous power of independent but public central banks to shield governments from or expose them to market forces. As monopoly suppliers of high-powered money, central banks provide liquidity to banks against “adequate” collateral. Collateral frameworks are thus a powerful tool for monetary authorities to steer the asset portfolios of financial institutions. This project traces the European Central Bank’s strategic use of its collateral framework as a disciplinary device against (perceived) fiscally profligate euro members. It analyzes the introduction – in reaction to the weakening of the Stability and Growth Pact in 2005 – of minimum credit rating requirements for government bonds pledged as collateral and shows how the ECB has managed a difficult balancing act between punishing fiscally non-compliant member states and saving the euro through collateral fine-tuning in the euro crisis. Project duration: October 2018 to November 2019.
 

 
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