Adjustment Mechanisms in a Currency Area

Charles Goodhart and D J Lee

No 9226, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Both the euro-area and the United States suffered an initially quite similar housing and financial shock in 2007/8, with several states in both regions being particularly badly affected. Yet there was never any question that the worst hit US states would need a special bail-out or leave the dollar area, whereas such concerns have worsened in the euro-area. We focus on three badly affected states, Arizona, Spain and Latvia, to examine the working of relative adjustment mechanisms within the currency region. We concentrate on four such mechanisms, relative wage adjustment, migration, net fiscal flows and bank flows. Only in Latvia was there any relative wage adjustment. Intra-EU migration has increased, but is more costly for those involved in the EU (than in the USA). Net federal financing helped Arizona and Latvia in the crisis, but not Spain. The locally focussed structure of banking amplified the crisis in Spain, whereas the role of out-of-state banks eased adjustment in Arizona and Latvia. The latter reinforces the case for an EU banking union.

Keywords: Assymetric shocks; Adjustment mechanisms; Relative unit labour costs; Migration; Fiscal transfers; Banking union (search for similar items in EconPapers)
JEL-codes: F36 F40 J60 O52 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-eec, nep-mon and nep-opm
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