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

  • Paul De Grauwe

    ()

    (LSE
    CEPS)

  • Yuemei Ji

    ()

    (University College London)

Registered author(s):

    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
    Date of revision:
    Handle: RePEc:nbb:reswpp:201310-243
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