Aftershocks of Monetary Unification: Hysteresis with a Financial Twist

March 13, 2017

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Tamim Bayoumi, and Barry J. Eichengreen Aftershocks of Monetary Unification: Hysteresis with a Financial Twist, (USA: International Monetary Fund, 2017) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen, 1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.

Subject: Asset prices, Bank credit, Banking, Commercial banks, Economic integration, Economic theory, Financial institutions, Monetary unions, Money, Prices, Supply shocks

Keywords: Aggregate demand, Aggregate demand shock, Aggregate supply, Aggregate supply supply curve, Aggregate-demand demand shock, Aggregate-demand response, Asset prices, Bank credit, Canonical aggregate-demand-aggregate-supply model, Commercial banks, Countries aggregate demand demand shock, Demand disturbance, Demand shock, Europe, European Monetary union, Hysterisis, Long-term aggregate-supply response, Monetary unions, Northern Europe, Optimum currency area, Price, Sloping aggregate demand curve, Supply shock, Supply shocks, Textbook aggregate-supply-aggregate-demand model, Textbook-style aggregate-supply, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/055
Stock No:

WPIEA2017055
ISBN:

9781475586220
ISSN:

1018-5941

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