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Keynesian and Austrian Perspectives on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth

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Author Info

  • Mathilde Maurel
  • Gunther Schnabl

    ()
    (Institute for Economic Policy, University of Leipzig)

Abstract

The 2010 European debt crisis has revived the discussion concerning the optimum adjustment strategy in the face of asymmetric shocks. Whereas Mundell's (1961) seminal theory on optimum currency areas suggests depreciation in the face of crisis, the most recent emergence of competitive depreciations, competitive interest rate cuts or currency wars questions the exchange rate as an adjustment tool to asymmetric economic development. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena in its series Global Financial Markets Working Paper Series with number 18-2011.

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Date of creation: 22 Aug 2011
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Handle: RePEc:hlj:hljwrp:18-2011

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Web page: http://www.gfinm.de

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Keywords: Shock Adjustment; Exchange Rate Regime; Growth;

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References

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  1. Gunther Schnabl & Holger Zemanek, 2011. "Inter-temporal savings, current account trends and asymmetric shocks in a heterogeneous European Monetary Union," Intereconomics: Review of European Economic Policy, Springer, vol. 46(3), pages 153-160, June.
  2. Chang, Roberto & Kaltani, Linda & Loayza, Norman, 2005. "Openness can be good for growth : the role of policy complementarities," Policy Research Working Paper Series 3763, The World Bank.
  3. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," CEPR Discussion Papers 5629, C.E.P.R. Discussion Papers.
  4. Fidrmuc, Jan, 2003. "Migration and Regional Adjustment to Asymmetric Shocks in Transition Economies," CEPR Discussion Papers 3798, C.E.P.R. Discussion Papers.
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  7. Fabrizio Coricelli & Mathilde Maurel, 2010. "Growth and crisis in transition : a comparative perspective," Documents de travail du Centre d'Economie de la Sorbonne 10020, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
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  9. Decressin, Jorg & Fatas, Antonio, 1995. "Regional labor market dynamics in Europe," European Economic Review, Elsevier, vol. 39(9), pages 1627-1655, December.
  10. Gunther Schnabl, 2009. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," Open Economies Review, Springer, vol. 20(4), pages 565-587, September.
  11. Harris Dellas & George S.Tavlas, 2009. "An Optimum-Currency-Area Odyssey," Working Papers 102, Bank of Greece.
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  16. Aghion, Philippe & Bacchetta, Philippe & Ranciere, Romain & Rogoff, Kenneth S., 2009. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Scholarly Articles 12490419, Harvard University Department of Economics.
  17. Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, 09.
  18. Corsetti, Giancarlo & Devereux, Michael P. & Hassler, John & Jenkinson, Tim & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2009. "The financial crisis," Munich Reprints in Economics 20099, University of Munich, Department of Economics.
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  21. repec:hal:journl:halshs-00469327 is not listed on IDEAS
  22. Ronald McKinnon & Gunther Schnabl, 2004. "The Return to Soft Dollar Pegging in East Asia: Mitigating Conflicted Virtue," International Finance, Wiley Blackwell, vol. 7(2), pages 169-201, 07.
  23. Eichengreen, Barry, 2002. "Financial Crises and What to Do About Them," OUP Catalogue, Oxford University Press, number 9780199257447.
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Citations

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Cited by:
  1. Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.
  2. Evžen Kočenda & Mathilde Maurel & Gunther Schnabl, 2012. "Short- and long-term growth effects of exchange rate adjustment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748599, HAL.
  3. Evžen Kocenda & Mathilde Maurel & Gunther Schnabl, 2012. "Short-Term and Long-Term Growth Effects of Exchange Rate Adjustment," CESifo Working Paper Series 4018, CESifo Group Munich.
  4. Kristina Spantig, 2013. "Keynesian Dominance in Crisis Therapy," Global Financial Markets Working Paper Series 45-2013, Friedrich-Schiller-University Jena.

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