25 Years IWH

Veranstaltung
08
May 2017

14:15 - 15:45

The Worst of All Worlds: Exchange Rate Adjustment in the Euro Crisis

Economic performance in the euro area has been heterogeneous during the recent decade. Still, intra-euro area real exchange rates have adjusted only slowly. In this paper, we first document that the half-life of intra-euro area real exchange rates has increased strongly after 2008.

Speaker
Professor Dr Gernot J. Müller , University of Tübingen
Location
IWH, conference room
Professor Dr Gernot J. Müller

Über den Autor

Professor Dr Gernot J. Müller

Professor of Economics, Chair of International Macroecononomics and Finance

Economic performance in the euro area has been heterogeneous during the recent decade. Still, intra-euro area real exchange rates have adjusted only slowly. In this paper, we first document that the half-life of intra-euro area real exchange rates has increased strongly after 2008. Second, we interpret this evidence through the lens of small open economy model which captures the key features of the crisis countries of the euro area: real exchange rates are misaligned, public debt is high, and there is uncertainty regarding euro membership of those countries in the future. We show that as these features interact, the half-life of the real exchange rate increases and macroeconomic adjustment slows down. Imperfect credibility as regards currency union membership entails i) a lack of flexibility common to fixed exchange rate regimes, as well as ii) a lack of discipline common to flexible exchange rate regimes−it brings about the worst of both worlds.

Ansprechpartner

Felix Pohle
Felix Pohle
Economist

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