European Journal of Economics and Economic Policies: Intervention

Monetary financing of public investment: a viable way forward for the euro area?

Andrew Watt * *

Keywords: monetary finance, monetary policy, public investment, euro area, ECB, EIB


This article poses the question of whether monetary financing of public investment constitutes a viable way forward for the euro area. The problems of low inflation, high unemployment and public debts seem scarcely resolvable in an environment that is constrained by the virtual exhaustion of monetary policy and legal limitations on expansionary fiscal policy. The author draws on the literature on monetary finance to identify key features of a scheme that could function in the context of EMU. He proposes to achieve an indirect monetary financing of public investment by the ECB committing to take newly issued EIB bonds on to its balance sheet. This would be essentially costless in a deflationary environment and could be expected to exhibit high multiplier effects. The independence of the ECB is maintained by making bond purchases subject to an inflation ‘trigger’.

Author Notes

I have benefited greatly from valuable discussions with colleagues from the IMK, the Austrian Chamber of Labour, the OFCE, Paris, and the ECLM, Copenhagen. Without implicating them in the remaining errors and the views expressed here, I would like to thank, in particular: Pasquale d'Apice, Stefan Ederer, Dirk Ehndts, Bela Galgoczi, Willi Koll, Marc Lavoie and Simon Wren-Lewis. The present article draws on and updates a proposal originally made in Watt (2015).

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