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Asymmetric trends and European monetary policy in t he Post-Bretton Woods Era

Johansson, Tony LU and Ljungberg, Jonas LU orcid (2013) In Lund Papers in Economic History
Abstract
In public debate the crisis of the eurozone has been laid on the footstep of imprudent government finance. This paper argues that the depth and longevity of the crisis instead is due to ‘asymmetric trends’ that are inherent in the eurozone. We show this, first, by a test of the ‘one-size-fits-all’ ECB monetary policy. The results provide an estimate of how ECB at the same time fuelled some ‘bubble economies’ and put on a deflationary pressure in other economies. Second, we measure how the higher inflation rate in the periphery eroded its international competitiveness under the restriction of the ‘irrevocably fixed exchange rates’. This is compared with the development during the preceding half century and periods with more flexible... (More)
In public debate the crisis of the eurozone has been laid on the footstep of imprudent government finance. This paper argues that the depth and longevity of the crisis instead is due to ‘asymmetric trends’ that are inherent in the eurozone. We show this, first, by a test of the ‘one-size-fits-all’ ECB monetary policy. The results provide an estimate of how ECB at the same time fuelled some ‘bubble economies’ and put on a deflationary pressure in other economies. Second, we measure how the higher inflation rate in the periphery eroded its international competitiveness under the restriction of the ‘irrevocably fixed exchange rates’. This is compared with the development during the preceding half century and periods with more flexible exchange rates. Before the EMS crisis of the early 1990s, the EMS had its ‘soft’ and its ‘hard’ phase. During the ‘soft’ phase, so called realignments of exchange rates adjusted for diverging trends in inflation and competitiveness. The ‘hard’ phase ended with the relaxation of the narrow band for the exchange rates. Again, a ‘soft’ phase followed until the ‘irrevocably’ fixing of the exchange rates that launched the euro. The catch-up and convergence of incomes within Western Europe have been largely enhanced by exchange rate adjustments. A pendulum between ‘soft’ and ‘hard’ phases have characterized European monetary policy and significantly conditioned European economic growth. A bottom line is that, ironically, the Maastricht aim of further integration actually is counteracted by the economic mechanisms of the monetary unification. (Less)
Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
euro, monetary policy, exchange rates, fiscal deficit
in
Lund Papers in Economic History
issue
128
pages
27 pages
publisher
Department of Economic History, Lund University
ISSN
1101-346X
language
English
LU publication?
yes
id
df39912e-b1b7-4580-8b44-07dd9c61c2c5 (old id 3131260)
date added to LUP
2016-04-01 12:53:07
date last changed
2018-11-21 20:09:57
@misc{df39912e-b1b7-4580-8b44-07dd9c61c2c5,
  abstract     = {{In public debate the crisis of the eurozone has been laid on the footstep of imprudent government finance. This paper argues that the depth and longevity of the crisis instead is due to ‘asymmetric trends’ that are inherent in the eurozone. We show this, first, by a test of the ‘one-size-fits-all’ ECB monetary policy. The results provide an estimate of how ECB at the same time fuelled some ‘bubble economies’ and put on a deflationary pressure in other economies. Second, we measure how the higher inflation rate in the periphery eroded its international competitiveness under the restriction of the ‘irrevocably fixed exchange rates’. This is compared with the development during the preceding half century and periods with more flexible exchange rates. Before the EMS crisis of the early 1990s, the EMS had its ‘soft’ and its ‘hard’ phase. During the ‘soft’ phase, so called realignments of exchange rates adjusted for diverging trends in inflation and competitiveness. The ‘hard’ phase ended with the relaxation of the narrow band for the exchange rates. Again, a ‘soft’ phase followed until the ‘irrevocably’ fixing of the exchange rates that launched the euro. The catch-up and convergence of incomes within Western Europe have been largely enhanced by exchange rate adjustments. A pendulum between ‘soft’ and ‘hard’ phases have characterized European monetary policy and significantly conditioned European economic growth. A bottom line is that, ironically, the Maastricht aim of further integration actually is counteracted by the economic mechanisms of the monetary unification.}},
  author       = {{Johansson, Tony and Ljungberg, Jonas}},
  issn         = {{1101-346X}},
  keywords     = {{euro; monetary policy; exchange rates; fiscal deficit}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{128}},
  publisher    = {{Department of Economic History, Lund University}},
  series       = {{Lund Papers in Economic History}},
  title        = {{Asymmetric trends and European monetary policy in t he Post-Bretton Woods Era}},
  url          = {{https://lup.lub.lu.se/search/files/3028716/4423182.pdf}},
  year         = {{2013}},
}