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Barry Eichengreen | The Legacy of the Great Moderation: Currency, Populism, and Credit

Hidden Forces

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Is the Stability and Growth Pact Really Needed?

Banks were allowed to attach zero risk weights, not to hold additional capital when they held additional government bonds. That gave them an incentive to load up on government bonds and especially the initially high-yielding ones. I would do away with the stability and growth pact if the banks were really successfully insulated from government budget problems. Governments should be given control of and responsibility for their own national fiscal policies," he says.

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