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

Author

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  • Paul De Grauwe

    () (LSE
    CEPS)

  • Yuemei Ji

    () (University College London)

Abstract

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.

Suggested Citation

  • Paul De Grauwe & Yuemei Ji, 2013. "The fragility of two monetary regimes: The European Monetary System and the Eurozone," Working Paper Research 243, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201310-243
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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp243en.pdf
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    References listed on IDEAS

    as
    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, December.
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    Cited by:

    1. repec:eee:finsta:v:33:y:2017:i:c:p:187-206 is not listed on IDEAS
    2. Camarero, Mariam & Carrion-i-Silvestre, Josep Lluís & Tamarit, Cecilio, 2015. "Testing for external sustainability under a monetary integration process. Does the Lawson doctrine apply to Europe?," Economic Modelling, Elsevier, vol. 44(C), pages 343-349.
    3. De Grauwe, Paul & Ji, Yuemei, 2014. "How much Fiscal Discipline in a Monetary Union?," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 348-360.
    4. Dana Kiselakova & Beata Sofrankova & Miroslava Soltes, 2016. "Analytical View on the Financial and Social Stability within the Euro Area: Empirical Evidence from Slovakia," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1637-1645.
    5. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance, 2017. "Eurozone bond market dynamics, ECB monetary policy and financial stress," Sciences Po publications 18, Sciences Po.
    6. Gros, Daniel, 2014. "The EMS Crisis of the 1990s: Parallels with the present crisis?," CEPS Papers 9119, Centre for European Policy Studies.

    More about this item

    Keywords

    government bond markets; interbank money market; interest rate spread; Eurozone; EMS; fragility;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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