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Flexibility versus stability: a difficult tradeoff in the Eurozone

de Grauwe, Paul and Ji, Yuemei (2016) Flexibility versus stability: a difficult tradeoff in the Eurozone. Credit and Capital Markets (3). ISSN 2199-1227

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Abstract

The optimal currency areas (OCA) theory has been influential in pushing eurozone countries towards structural reforms to make product and labour markets more flexible. The underlying assumption of the OCA prescription for structural reform is that asymmetric shocks are permanent. However, when shocks are temporary it does not follow that more flexibility is the answer. When shocks are the result of business cycle movements, the way to deal with them is by stabilisation efforts. We provide empirical evidence that suggests that the biggest shocks in the eurozone were the result of business cycle movements. These were relatively well synchronised, except for their amplitude. We argue that efforts to stabilise the business cycles should be strengthened relative to the efforts that have been made to impose structural reforms, and consider the implications for the governance of the eurozone.

Item Type: Article
Official URL: http://ejournals.duncker-humblot.de/loi/kuk
Additional Information: © 2016 Duncker & Humblot GmbH
Divisions: European Institute
Subjects: H Social Sciences > HF Commerce
Sets: Departments > European Institute
Date Deposited: 01 Aug 2016 14:28
Last Modified: 04 Oct 2019 23:06
URI: http://eprints.lse.ac.uk/id/eprint/67314

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