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

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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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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 11004.

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Length: 26 pages
Date of creation: Jan 2011
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Handle: RePEc:mse:cesdoc:11004

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Keywords: Exchange rate regime; crisis; shock adjustment; theory of optimum currency areas; Mundell; Schumpeter; Hayek; competitive depreciations; currency war.;

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Cited by:
  1. Kristina Spantig, 2013. "Keynesian Dominance in Crisis Therapy," Global Financial Markets Working Paper Series 45-2013, Friedrich-Schiller-University Jena.
  2. 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.
  3. Evžen Kočenda & Mathilde Maurel & Gunther Schnabl, 2013. "Short- and Long-term Growth Effects of Exchange Rate Adjustment," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 137-150, 02.
  4. 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.

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