Abstract

http://ssrn.com/abstract=2167231
 


 



Adjustment Mechanisms in a Currency Area


Charles Goodhart


London School of Economics & Political Science (LSE) - Financial Markets Group

James Lee


London School of Economics & Political Science (LSE) - Financial Markets Group

October 26, 2012


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.

Number of Pages in PDF File: 35

Keywords: Asymmetric shocks, adjustment mechanisms, relative unit labour costs, migration, fiscal transfers, banking union

JEL Classification: F36, F40, J60, O52

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Date posted: October 27, 2012  

Suggested Citation

Goodhart, Charles and Lee, James, Adjustment Mechanisms in a Currency Area (October 26, 2012). Available at SSRN: http://ssrn.com/abstract=2167231 or http://dx.doi.org/10.2139/ssrn.2167231

Contact Information

Charles A.E. Goodhart (Contact Author)
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)
James Lee
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
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