Chapter 6 demonstrates why the Eurosystem is not an operationally decentralized central bank (like the Fed), but a system of currency boards that is at risk of collapse because individual national central banks (NCBs) can go bankrupt. The ECB and the nineteen NCBs that make up the Eurosystem represent twenty independent profit and loss centers. No individual NCB can decide on the amount of monetary issuance it can engage in. That is a collective decision of the Governing Council of the ECB.

From the perspective of an individual NCB it is as if all its euro-denominated debt is foreign-currency denominated. Own-risk activities undertaken by NCBs have vastly increased in scope and scale. Individual NCBs therefore can become insolvent even if the consolidated Eurosystem is solvent.

Reducing or, preferably, eliminating own-risk activities by NCBs is one obvious solution. Another is reducing the riskiness of the assets that some NCBs and the commercial banks in their jurisdictions are exposed to. This could be done through financial engineering, through sovereign risk sharing or through regulatory measures limiting the exposure of banks to any counterparty, including their own sovereign.

The original inspiration for this volume was the Frederico Caffè Lectures I gave in Rome on December 13–14, 2011. Quite a lot of water has flown down the Tiber since then and my thinking about the monetary and fiscal policy issues I addressed in the lectures has evolved and, I hope, become more coherent.

The simple idea that motivates most of this book is that central banks make a significant, indeed at times essential, contribution to the fiscal space of the sovereign. This is because the ability to issue monetary liabilities, especially currency, is a source of profits to the central bank.

Chapter 5 uses the model of the previous Chapter to discuss three ways to eliminate the zero lower bound on nominal interest rates: (1) abolish currency; (2) tax currency’ and (3) introduce a variable exchange rate between currency and bank reserves (deposits) with the central bank. We come down in favor of getting rid of cash as the most robust of these three options. This would have the further advantage of eliminating a preferred store of value and means of payment for illegal activities. There are both economic and political costs associated with the abolition of cash, however. Some of these can be addressed or at least mitigated by eliminating only the larger denomination currency notes. This would lower the effective lower bound without eliminating it.

We confirm that helicopter money drops stimulate nominal aggregate demand even when the economy is permanently at the zero lower bound.