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Adjustment Mechanisms in a Currency Area

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  • C. Goodhart

  • D. Lee

Abstract

Both the euro-area and the United States suffered an initially quite similar housing and financial shock in 2007/8, with several states in both regions being particularly badly affected. Yet there was never any question that the worst hit US states would need a special bail-out or leave the dollar area, whereas such concerns have worsened in the euro-area. We focus on three badly affected states, Arizona, Spain and Latvia, to examine the working of relative adjustment mechanisms within the currency region. We concentrate on four such mechanisms, relative wage adjustment, migration, net fiscal flows and bank flows. Only in Latvia was there any relative wage adjustment. Intra-EU migration has increased, but is more costly for those involved in the EU (than in the USA). Net federal financing helped Arizona and Latvia in the crisis, but not Spain. The locally focussed structure of banking amplified the crisis in Spain, whereas the role of out-of-state banks eased adjustment in Arizona and Latvia. The latter reinforces the case for an EU banking union. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • C. Goodhart & D. Lee, 2013. "Adjustment Mechanisms in a Currency Area," Open Economies Review, Springer, vol. 24(4), pages 627-656, September.
    • Handle: RePEc:kap:openec:v:24:y:2013:i:4:p:627-656
    DOI: 10.1007/s11079-013-9268-6
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    References listed on IDEAS

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    4. Goodhart, Charles A. E., 1998. "The two concepts of money: implications for the analysis of optimal currency areas," European Journal of Political Economy, Elsevier, vol. 14(3), pages 407-432, August.
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    Cited by:

    1. Goodhart, C.A.E., 2014. "Lessons for Monetary Policy from the Euro-Area Crisis," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 378-382.
    2. Buch, Claudia M. & Körner, Tobias & Weigert, Benjamin, 2013. "Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute," IWH Discussion Papers 13/2013, Halle Institute for Economic Research (IWH).
    3. Bofinger, Peter & Buch, Claudia M. & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2013. "Gegen eine rückwärtsgewandte Wirtschaftspolitik. Jahresgutachten 2013/14 [Against a backward-looking economic policy. Annual Report 2013/14]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201314.

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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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