Aftershocks of monetary unification: Hysteresis with a financial twist

Tamim Bayoumi and Barry Eichengreen

Journal of Banking & Finance, 2020, vol. 113, issue C

Abstract: In the 1990s it was widely agreed that neither Europe nor the United States satisfied the conditions for constituting an optimum currency area, although the U.S. came closer (Bayoumi and Eichengreen 1993). Moderating this concern about Europe was the fact that it was possible to distinguish a regional core and periphery. Using updated data, we confirm that the United States remains closer to an optimum currency area. More intriguingly, the Euro Area shows striking changes in correlations and responses. We interpret these 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.

Keywords: Optimum currency area; European Monetary union; Hysterisis (search for similar items in EconPapers)
JEL-codes: E32 F36 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Aftershocks of Monetary Unification: Hysteresis with a Financial Twist (2017)
Working Paper: Aftershocks of Monetary Unification: Hysteresis with a Financial Twist (2017)
Working Paper: Aftershocks of Monetary Unification: Hysteresis with a Financial Twist (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:113:y:2020:i:c:s0378426618301298

DOI: 10.1016/j.jbankfin.2018.06.005

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