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The fragility of two monetary regimes: The European Monetary System and the Eurozone

Listed author(s):
  • Paul De Grauwe

    ()

    (LSE
    CEPS)

  • Yuemei Ji

    ()

    (University College London)

We analyze the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened.

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File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp243en.pdf
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Paper provided by National Bank of Belgium in its series Working Paper Research with number 243.

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Length: 41 pages
Date of creation: Oct 2013
Handle: RePEc:nbb:reswpp:201310-243
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  1. Eichengreen, Barry & Mody, Ashoka, 2000. "Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans," Journal of Development Economics, Elsevier, vol. 63(1), pages 5-44, October.
  2. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  3. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
  4. James, Harold, 2012. "Making the European Monetary Union," Economics Books, Harvard University Press, number 9780674066830, Spring.
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