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

Listed author(s):
  • Mathilde Maurel
  • Gunther Schnabl

    ()

    (Institute for Economic Policy, University of Leipzig)

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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File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_hlj18-2011.pdf
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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
Handle: RePEc:hlj:hljwrp:18-2011
Contact details of provider: Web page: http://www.gfinm.de

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