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

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  • 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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  1. Gunther Schnabl, 2009. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," Open Economies Review, Springer, Springer, vol. 20(4), pages 565-587, September.
  2. 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, Wiley Blackwell, vol. 31(9), pages 1226-1252, 09.
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Citations

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

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