Solvency rule and capital centralisation in a monetary union

Brancaccio and Fontana (2013) have suggested that the central bank influences the solvency conditions of firms and households in the economic system. This ‘solvency rule’ is examined here within a stylised model of a monetary union characterised by different rates of accumulation and inflation across its two member countries. The rule highlights the existence of a relationship between the interest rate set by the central monetary authority and the allocation of ownership of existing physical capital among the member countries of the monetary union, i.e. the ‘rates of capital centralisation’. The paper also shows the nexus between solvency and government debt sustainability, and examines the implications of deflationary or currency devaluation policies for the solvency conditions.