The Costs and Benefits for Joining a Common Currency with Emphasis on Weaker Member States: The Pre-crisis Debate

Theodore Pelagidis and Michael Mitsopoulos ()
Additional contact information
Michael Mitsopoulos: Hellenic Federation of Enterprizes

Chapter Chapter 2 in Who’s to Blame for Greece?, 2021, pp 9-26 from Springer

Abstract: Abstract Long before the crisis, the dominant theory of an Optimum Currency Area (OCA) was that there are necessary conditions or properties for success (Mundell, A Theory of Optimum Currency Areas. American Economic Review 51 (4): 657–665, 1961; McKinnon, Optimum Currency Areas. American Economic Review 53 (3–5): 17–25, 1963; Kenen, Monetary Problems of the International Economy, ed. R. Mundell and A. Swoboda, 41–60. Chicago: University Press, 1969). The basic premise was that the fundamental requirement for a successful currency area is wage/price flexibility and mobility of factors of production as well as harmonization of economic and political institutions. This injects sufficient flexibility in the system to hedge against the so-called asymmetric demand shocks/disturbances. Asymmetric shocks are demand shocks or disturbances that hit two or more regions or countries with a common currency. When shocks are asymmetric, business cycles between two countries—let us assume Greece and Germany—are de-synchronized. De-synchronization of business cycles means that Greece experiences, for example, a negative growth rate along with relatively low inflation, while Germany experiences, at the same time, a high growth that goes with low unemployment. Then, the two countries need different monetary stabilization policies. Greece needs some accommodation through decreasing interest rates in order to stimulate economic activity, while Germany needs some contraction to fight an excessive inflation rate. Then, the dilemma that the European Central Bank (ECB) faces has to do with the diversified stabilization prescriptions the two aforementioned economies require.

Date: 2021
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-64081-1_2

Ordering information: This item can be ordered from
http://www.springer.com/9783030640811

DOI: 10.1007/978-3-030-64081-1_2

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().