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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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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
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Handle: RePEc:hlj:hljwrp:18-2011
Contact details of provider: Web page: http://www.gfinm.de

Keywords: Shock Adjustment; Exchange Rate Regime; Growth;

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Find related papers by JEL classification:
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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  1. Babetskii, Ian & Boone, Laurence & Maurel, Mathilde, 2002. "Exchange Rate Regimes and Supply Shocks Asymmetry: The Case of the Accession Countries," CEPR Discussion Papers 3408, C.E.P.R. Discussion Papers.
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  21. Ronald McKinnon & Gunther Schnabl, 2004. "The Return to Soft Dollar Pegging in East Asia. Mitigating Conflicted Virtue," International Finance 0406007, EconWPA, revised 07 Jul 2004.
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Cited by:

  1. Evžen Kočenda & Mathilde Maurel & Gunther Schnabl, 2013. "Short- and Long-term Growth Effects of Exchange Rate Adjustment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00971618, HAL.
  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. Kristina Spantig, 2013. "Keynesian Dominance in Crisis Therapy," Global Financial Markets Working Paper Series 45-2013, Friedrich-Schiller-University Jena.
  4. Skorepa, Michal & Komarek, Lubos, 2015. "Sources of asymmetric shocks: The exchange rate or other culprits?," Economic Systems, Elsevier, vol. 39(4), pages 654-674.
  5. Olivier Damette & Mathilde Maurel & Michael A. Stemmer, 2016. "What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01318131, HAL.
  6. 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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