Universal Discipline or Individual Discipline: On the Viability of the Eurozone as a Nonadjustable Local Fixed Exchange Rate Regime

Masayuki Otaki

Chapter 8 in Keynesian Economics and Price Theory, 2015, pp 97-106 from Springer

Abstract: Abstract This chapter considers under what conditions a regionally fixed exchange rate system without a huge economy is sustainable. The Eurozone is a typical example. In general, the Eurozone tends to be regarded as a currency area. However, the political power of the European Central Bank is not strong enough to control the fiscal and monetary policies of each affiliate country directly. That is, the unification of central banks within the area is not complete, and the Eurozone is therefore not a currency area in the sense of Mundell. It should be regarded as a regional fixed exchange rate system. An open economy Keynesian model under a fixed exchange rate system with a dynamic microeconomic foundation is constructed. The following results were obtained. First, whenever a government’s tax-levying ability is limited, austere fiscal policies are required to sustain the system. Second, low tax-levying ability has a negative effect on the economic welfare of a country because such fragility limits its discretionary monetary policy.

Keywords: Eurozone; Regional fixed exchange rates; Levying ability; Sustainability of currency alignment; Austere fiscal-monetary policies; Hold-up problem (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advchp:978-4-431-55345-8_8

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DOI: 10.1007/978-4-431-55345-8_8

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