MACROECONOMIC DIFFERENTIALS AND ADJUSTMENT IN THE EURO AREA. ESRI Research Bulletin 2009/3/1

Siedschlag, Iulia (2009) MACROECONOMIC DIFFERENTIALS AND ADJUSTMENT IN THE EURO AREA. ESRI Research Bulletin 2009/3/1. UNSPECIFIED.

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Abstract

In a monetary union such as the Euro Area, monetary policy can only address common shocks. Adjustment to asymmetric shocks – country specific shocks or common shocks which affect countries in different ways – cannot take place through monetary policy, nominal interest rates or exchange rates but must take place through other mechanisms. Theory suggests four main channels through which equilibrium can be restored: a) market-driven price and output adjustment; b) policy induced fiscal adjustment; c) risk-sharing against country-specific shocks through fiscal transfers and financial integration; and d) labour mobility.

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