Aftershocks of Monetary Unification: Hysteresis with a Financial Twist

Tamim Bayoumi and Barry Eichengreen

No 2017/055, IMF Working Papers from International Monetary Fund

Abstract: Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen, 1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret 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: WP; demand shock; aggregate supply; aggregate demand; supply shock; price; Optimum currency area; European Monetary union; hysterisis; aggregate supply supply curve; textbook aggregate-supply-aggregate-demand model; demand disturbance; aggregate demand shock; canonical aggregate-demand-aggregate-supply model; aggregate-demand demand shock; countries aggregate demand demand shock; textbook-style aggregate-supply; sloping aggregate demand curve; aggregate-demand response; long-term aggregate-supply response; Supply shocks; Asset prices; Monetary unions; Commercial banks; Bank credit; Europe; Northern Europe (search for similar items in EconPapers)
Pages: 26
Date: 2017-03-13
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Aftershocks of monetary unification: Hysteresis with a financial twist (2020)
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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