Thursday, May 24, 2012

The Misunderstood Monetary Union

One of the fields where mainstream economics is unable to match history and current events is in its applications to monetary unions. Much has been said for example about the Eurozone these days that is not only wrong but that is so evidently "selectively forgotten" when applied to equally imperfect currency areas such as China, Brazil and even the US. Berka, Deveraux and Engel provide more evidence on how clueless pop economists have been:
"It is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates. Recently, this has been seen as a key failure of the Eurozone. This paper presents evidence that throws doubt on this conclusion. Our evidence suggests that real exchange rate movement within the Eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the Eurozone. This interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods."

No comments: