The Fragility of Two Monetary Regimes: The European Monetary System and the Eurozone

National Bank of Belgium Working Paper No. 243

41 Pages Posted: 14 Oct 2013

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Yuemei Ji

KU Leuven - Faculty of Business and Economics (FEB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2013

Abstract

We analyze the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened.

Keywords: government bond markets, interbank money market, interest rate spread, Eurozone, EMS, fragility

JEL Classification: E42, E52, E58, F33

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul and Ji, Yuemei, The Fragility of Two Monetary Regimes: The European Monetary System and the Eurozone (October 2013). National Bank of Belgium Working Paper No. 243, Available at SSRN: https://ssrn.com/abstract=2339955 or http://dx.doi.org/10.2139/ssrn.2339955

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuemei Ji

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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