Author Question: How do constraints on monetary policy in the United States differ from those experienced by euro ... (Read 31 times)

jlmhmf · **on:** Jun 30, 2018

How do constraints on monetary policy in the United States differ from those experienced by euro zone countries?

What will be an ideal response?

Question 2

Is the United States in danger of a sovereign default because, like countries in the euro zone, it has high current account deficits and levels of public debt?

What will be an ideal response?

marict · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

United States monetary policy constraints are quite different from those encountered by countries in the euro zone. The US can print dollars to pay off debts as necessary and, while the result might be a higher rate of inflation, it makes it virtually impossible for the US to default on its public debts. Euro countries have a European Central Bank that must make decisions regarding monetary policy that will affect all of the euro zone countries. One possibility that has been discussed is to make it possible to conditionally remove countries from the euro zone to prevent the destruction of the monetary union. Note that this would be equivalent to the United States deciding to remove a state from the union if the state threatened bankruptcy.

Answer to Question 2

No. The United States has a central bank that can print money as needed to service its debt. It is in no danger of default. Euro zone countries, on the other hand, do not have individual central banks capable of printing money to pay off debt. Instead the European Central Bank and all member countries must collectively agree on monetary policy. Countries that have managed their affairs prudently are understandably unwilling to support the profligate behavior of other countries.