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Asymmetric Trends and European Monetary Policy in the post-Bretton Woods Era

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Abstract
This paper argues that the depth and longevity of the crisis in the eurozone is due to structural and institutional differences between its members and that these are difficult to handle in a monetary union. We show this, first, by a test of the ‘one-size-fits-all’ ECB monetary policy. The results provide an estimate of how ECB at the same time fuelled some ‘bubble economies’ and put on a deflationary pressure in other economies. Second, we measure how the higher inflation rate in the periphery eroded its international competitiveness under the restriction of the ‘irrevocably fixed exchange rates’. This is compared with the development during preceding decades with more flexible exchange rates. The catch-up and convergence of incomes within Western Europe, up to the mid-1990s, was significantly enhanced by exchange rate adjustments. Without this adjustment mechanism catch-up has got a headwind which is contributing to the recent widening of the income gap in the eurozone. Thus, as a historical irony, the Maastricht aim of further integration has actually been counteracted by the economic mechanisms of the monetary unification.

Suggested Citation

  • Johansson, Tony & Ljungberg, Jonas, 2013. "Asymmetric Trends and European Monetary Policy in the post-Bretton Woods Era," Lund Papers in Economic History 128, Lund University, Department of Economic History.
    • Handle: RePEc:hhs:luekhi:0128
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    File URL: http://www.ekh.lu.se/media/ekh/forskning/lund_papers_in_economic_history/128.pdf
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    References listed on IDEAS

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    1. Jonas Ljungberg, 2004. "The EMU in a European Perspective: Lessons from Monetary Regimes in the Twentieth Century," Palgrave Macmillan Books, in: Jonas Ljungberg (ed.), The Price of the Euro, chapter 8, pages 121-141, Palgrave Macmillan.
    2. Julien Garnier & Bjørn-Roger Wilhelmsen, 2005. "The natural real interest rate and the output gap in the euro area: A joint estimation," Working Paper 2005/14, Norges Bank.
    3. Kwapil, Claudia & Scharler, Johann, 2010. "Interest rate pass-through, monetary policy rules and macroeconomic stability," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 236-251, March.
    4. Kok, Christoffer & Werner, Thomas, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series 580, European Central Bank.
    5. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    euro; monetary policy; exchange rates; fiscal deficit;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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