Aftershocks of Monetary Unification: Hysteresis with a Financial Twist

IMF Working Papers, March 13, 2017

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Aftershocks of Monetary Unification: Hysteresis with a Financial Twist

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Bibliographic details

• Authors: Tamim Bayoumi, Barry J. Eichengreen
• Published: March 13, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475586220.001

Summary and core findings

• Revisits 1990s conclusion that neither Europe nor the United States was an optimum currency area, noting the earlier finding that a regional core and periphery could be distinguished (Bayoumi and Eichengreen, 1993).
• Finds that the United States "is remains" closer to an optimum currency area than the Euro Area.
• Identifies "striking changes in correlations and responses" in the Euro Area interpreted as "hysteresis with a financial twist," where the financial system causes aggregate supply and demand shocks to reinforce each other.
• Uses canonical aggregate-demand–aggregate-supply terminology and textbook-style aggregate-supply–aggregate-demand frameworks in the analysis.

Policy implications and recommendations

• Argues that the Euro Area needs "vigorous, coordinated regulation of its banking and financial systems by a single supervisor."
• States the policy conclusion succinctly: "monetary union without banking union will not work."

Subjects and keywords (as listed)

• Subjects: 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

Content in this bundle

• Aftershocks of Monetary Unification: Hysteresis with a Financial Twist, WP/17/55, March 2017
  • Aftershocks of Monetary Unification: Hysteresis with a Financial Twist, WP/17/55, March 2017 (Markdown version)
  • Aftershocks of Monetary Unification: Hysteresis with a Financial Twist, WP/17/55, March 2017 (PDF)