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Adjustment Mechanisms in a Currency Area

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  • Goodhart, Charles A
  • Lee, D J

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.

Suggested Citation

  • Goodhart, Charles A & Lee, D J, 2012. "Adjustment Mechanisms in a Currency Area," CEPR Discussion Papers 9226, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9226
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    References listed on IDEAS

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    1. Decressin, Jorg & Fatas, Antonio, 1995. "Regional labor market dynamics in Europe," European Economic Review, Elsevier, vol. 39(9), pages 1627-1655, December.
    2. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
    3. 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.
    4. Vasily Astrov & Vladimir Gligorov & Peter Havlik & Mario Holzner & Gabor Hunya & Sebastian Leitner & Zdenek Lukas & Anton Mihailov & Olga Pindyuk & Leon Podkaminer & Josef Pöschl & Sandor Richter & Wa, 2008. "Weathering the Global Storm, yet Rising Costs and Labour Shortages May Dampen Domestic Growth," wiiw Forecast Reports 1, The Vienna Institute for International Economic Studies, wiiw.
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    More about this item

    Keywords

    adjustment mechanisms; assymetric shocks; banking union; fiscal transfers; migration; relative unit labour costs;

    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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