Aftershocks of Monetary Unification: Hysteresis with a Financial Twist

25 Pages Posted: 27 Feb 2017 Last revised: 15 Mar 2017

See all articles by Tamim Bayoumi

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: February 2017

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 if the Euro Area wishes to avoid financial booms and busts it will need vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will be prone to economic and financial instability.

Suggested Citation

Bayoumi, Tamim and Eichengreen, Barry, Aftershocks of Monetary Unification: Hysteresis with a Financial Twist (February 2017). NBER Working Paper No. w23205. Available at SSRN: https://ssrn.com/abstract=2924295

Tamim Bayoumi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Barry Eichengreen

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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